What is Account Balance? (Definition, Example and its Uses)

Accounting Tutorials

What is Account Balance?

The term account balance describes the total amount of money held as an asset in a financial account, such as current account or savings account in a bank or other similar financial institution, at any point in time. Further, an account balance 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, the account balance 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.

Relevance and Uses of Account Balance

It is important to understand the underlying need of an account balance and 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 reconciliation 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.

Examples of Account Balance

Given below are the examples of the Account balance to understand it better.

Example #1

Let us take an example of an account balance for 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 that, an account balance will include the purchases that he made along with the item that he returned.

Now, Debit balance 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 balance for David = $200

Finally, Account balance for David = Debit balance – Credit balance

Account balance for David = $875 – $200
= $675

Therefore, the account balance for David is $675.

Example #2

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

Therefore Account Balance will be –

= $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

Therefore, True account balance will be –

= $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 debit transaction to keep track of the most accurate picture of the account.

Other Important Terms Related to Account Balance

Some of the 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 income, 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 in 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.

Account Balance