Definition
A ledger balance, in finance, refers to the sum of money in a bank account at the beginning of each business day. It includes all deposits and withdrawals that have been posted to that account. This balance may not include checks or payments that have been made but not yet processed.
Key Takeaways
- Ledger Balance is the balance in a company’s financial ledger at the beginning or end of the day, including all deposits and withdrawals.
- This balance is primarily used for a bank’s internal records and may not always align with the available balance for spending or withdrawals due to pending transactions or holds.
- The Ledger Balance provides valuable information about a company’s or individual’s financial health, showing the total amount of cash on hand at a particular point in time.
Importance
The finance term “Ledger Balance” holds significant importance as it serves as an up-to-date, real-time reference of a bank account’s balance, including all deposits, withdrawals, interest earned, and fees or charges.
Across various positions in businesses and financial institutions; managers, account holders, and accountants all rely on ledger balances to assess the current standing of financial resources.
This information is crucial for making informed decisions regarding future spending, investment, or saving activities.
Thus, ledger balance acts as a vital tool in maintaining and controlling the cash flow of an organization or individual, promoting financial stability and accuracy in account management.
Explanation
The purpose of a ledger balance is to give an accurate snapshot of a bank account’s total available funds at the start of each business day. Consequently, this balance serves as a starting point in tracking all the transactions, such as cash withdrawals, deposits, transfers, and other banking activities that occur during that day.
Primarily, businesses and individuals use it to track their spending, manage their finances and maintain liquidity, ultimately aiding in financial planning and stability. In banking operations, the ledger balance is used to calculate the interest due to an account holder.
For instance, in savings accounts, the bank typically uses the ledger balance to compute the interest to be applied. Therefore, maintaining a higher ledger balance would result in the accrual of more interest.
On the other hand, in the case of loans, the ledger balance helps determine the owed interest based on the outstanding loan amount. Thus, the ledger balance plays a crucial role in fostering transparency in financial record-keeping and contributing to prudent financial management.
Examples of Ledger Balance
Personal Checking Account: A primary example of a ledger balance is seen in personal checking accounts. If an individual has deposited $1,000 into their account, their ledger balance appears as $1,000 even if they have written a check for $200 that hasn’t been cashed yet. The $200 remains a part of the ledger balance until the check is cashed and the bank processes the transaction.
Business Inventory Tracking: Businesses use ledger balances to track inventory. For instance, if a retail store starts the month with $20,000 worth of clothes, then sells $5,000 and purchases another $10,000 during the month, the ledger balance at the end of the month shows $25,
This reflects the total value of the clothing that the store currently has.
Credit Card Statements: Another real-world example of ledger balance can be seen in credit card statements. The ledger balance is the total balance at the end of the billing cycle. It includes all purchases, payments, fees, and penalties. So, if a person makes purchases totaling to $1,500, pays off $500 before the billing cycle ends, and the annual fee of $100 is charged, then the ledger balance that will appear in the statement will be $1,100 ($1,500 – $500 + $100). This balance will be the starting point for the next billing cycle, on which interest will be calculated if not paid in full.
FAQs on Ledger Balance
What is a Ledger Balance?
A Ledger Balance, in banking and accounting, refers to the total amount of money in a particular bank account at the beginning of the day. It includes all the transactions made during the preceding day such as deposits, withdrawals and transfers.
How is Ledger Balance different from Available Balance?
While the Ledger Balance represents the total amount in an account at the beginning of a business day, the Available Balance is the amount of funds you can use immediately. It considers all the pending transactions, checks, or account holds.
Why is there a difference between my Ledger Balance and Available Balance?
The difference between your Ledger Balance and Available Balance is typically due to pending transactions or holds. Pending transactions may include checks you’ve deposited that haven’t cleared, debit card transactions that are waiting to be finalized, or scheduled payments.
Can I spend my entire Ledger Balance?
While it might seem that you can spend your entire Ledger Balance, doing so may lead to overdraft fees. This is because the Ledger Balance does not account for pending transactions, which might still be processed and cause your account’s balance to decrease further.
Does Ledger Balance update in real-time?
Unlike Available Balance, a Ledger Balance does not update in real-time. Typically, it’s updated once a day at the end of a business day to reflect all of the day’s transactions.
Related Entrepreneurship Terms
- Bank Reconciliation
- Outstanding Checks
- Financial Statement
- Debit and Credit
- Bookkeeping
Sources for More Information
- Investopedia: As a highly reliable financial site, Investopedia houses thousands of financial terms definitions, including the ledger balance. Do a quick search here to find detailed explanations and examples.
- Bankrate: This site contains a plethora of information on banking, including terms like ledger balance. Use the search function for more specific information.
- Accounting Tools: A site completely dedicated to accounting, this is another excellent resource for definitions and explanations of various financial terms, including ledger balance.
- Corporate Finance Institute: This site provides a vast number of resources and information about many financial terms and concepts. Simply use its search feature to learn more about the ledger balance.
