What is Account Balance?

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 actual available fund in an individual’s account owing to some pending transactions or unprocessed cheques at the bank.

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Examples of Account Balance

Example #1

Let us take an example of a credit card. Let us assume that 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 he made and the item 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.read more 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. read more for David = $200

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

  • = $875 – $200 = $675

Example #2

Let us take an example of a current accountExample Of A Current AccountThe current account formula of the balance of payment measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers. Current account formula = (X-M) + NI + NTread more 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 of $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,

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,

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 conscious of the same and record every credit and debit transactionDebit TransactionDebit represents either an increase in a company’s expenses or a decline in its revenue. read more to keep track of the most accurate picture of the account.

Relevance and Uses

It is important to understand the underlying need for an account balance, and a few of the major points have been listed below:

  • The primary requirement 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 ensure that the bank has not overcharged any of the fees or lost any money.It also helps match one’s 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.read more is required.Further, regular checking of the balance helps avoid any erroneous transaction and make sure that mistakes are caught before it is too late.

#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. read more, is known as a savings account. A savings account may offer a limited number of withdrawals that an account holder can make from their account each month. Further, a savings account typically charges fees for non-maintenance of the minimum average monthly balance in the account. Usually, such a type of account is not offered a 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 is known as a current account. Such an account is accessible by a teller, ATM, or online banking. M1, the most liquid category of money supply in a nation, includes current account deposits besides physical money and negotiable order of withdrawal accounts with 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 a cash advance. The borrowing limits of a credit card are determined based on the cardholder’s 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 –

  • What is the Nominal Account?Drawing AccountIncome Summary AccountPrudence Concept