What is Account Balance?
Account Balance is the balance which is present in the financial repository of the person like saving account or checking account at the given point of time. Further, it can also mean the total amount of money that a borrower is liable to pay to a third party, such as utility company, credit card company and mortgage banker or other similar lender or creditor.
However, in either of the cases, it represents the net amount after all debit and credit transactions have been factored in. Nevertheless, there are times when an account balance differs from the actually available fund in an individual’s account owing to some pending transactions or unprocessed cheques at the bank.
Examples of Account Balance
Let us take an example of a credit card. Let us assume that a person named David has made several purchases of $500, $150 and $225, and then returned one of the items that cost him $200.
As mentioned in the previous section, an account balance will include the purchases that he made along with the item that he returned.
Now, Debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. for David = Expense for purchase of items = $500 + $150 + $225
- Debit balance for David = $875
Again, Credit balance for David = Cost of items returned
- Credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. for David = $200
Finally, Account balance for David = Debit balance – Credit balance
- = $875 – $200 = $675
Let us take an example of a current account with a starting balance of $1,500 and try to illustrate the impact of a pending transaction. The account holder recently received a cheque for $2,500, and then he also wrote a cheque for a scheduled automatic payment for $2,000. However, the cheque for the automatic payment is yet to be processed. Determine the account balance and the true balance (fund available for withdrawal).
Since the second cheque is yet to be processed, at this point in time,
Account balance = Opening balance + Cheque received
- = $1,500 + $2,500
- = $4,000
However, owing to the unprocessed cheque, the fund available for withdrawal at this point in time,
True account balance = Opening balance + Cheque received – Cheque written
- = $1,500 + $2,500 – $2,000
- = $2,000
It is important to note that although the account balance shows $4,000, the true balance available for withdrawal is $2,000. As such, the account holder should be cognizant of the same, and record every credit, and the debit transactionDebit TransactionDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. to keep track of the most accurate picture of the account.
Relevance and Uses
It is important to understand the underlying need of an account balance, and a few of the major points have been listed below:
- The primary requirement of it is to make sure that the account holder knows how much money is there in the account. It can be checked online, with an app, by phone, at an ATM, etc.
- It is also helpful in keeping track of various bank transactions to make sure that the bank has not overcharged any of the fees or has not lost any money.
- It also helps in matching one’s own records with the bank’s records and check if any reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction. is required.
- Further, regular checking of the balance helps in avoiding any erroneous transaction and makes sure that mistakes are caught before it is too late.
Other Important Terms Related to Account Balance
#1 – Savings account
A deposit account held at a bank or other financial institution, which is interest-bearing in nature that translates into interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. , is known as a savings account. A savings account may offer a limited number of withdrawals that an account holder can make from his / her account each month. Further, a savings account typically charges fees for non-maintenance of the minimum average monthly balance in the account. Usually, such type of accounts is not offered cheque facility by the bank.
#2 – Current account
A deposit account held at a bank or other financial institution that consists of funds held in an account from which deposited money can be withdrawn at any time is known as a current account. Such an account is accessible by a teller, ATM, or online banking. M1, which is the most liquid category of money supply in a nation, includes current account deposits besides physical money and negotiable order of withdrawal accounts that have no maturity period but limited withdrawals or transfers.
#3 – Credit card
A credit card is a payment card issued by a bank or other financial institution that enables the cardholder to borrow money to pay a merchant for availed goods and services. The issuance of a credit card comes along with the implicit promise that the cardholder will pay back the borrowed amount plus any additional applicable charges. Further, a credit card may also offer a line of credit to a cardholder that permits him to borrow money in the form of a cash advance. The borrowing limits of a credit card are determined based on the cardholder’s individual credit rating.
This has been a guide to What is Account Balance and its definition? Here we discuss the definition of Account Balance along with its uses and examples to understand it better. You can learn more about accounting with the following articles –