As a new business owner, there will be a variety of financial reports and terms that you may not be aware of. One such example is ledger balance and available balance, which we explore in this article.
What is ledger balance?
The ledger balance is the total amount of money that is available in an account, regardless of any pending transactions or holds that may affect the account’s available balance.
It represents the current balance in the account at a given point in time after all debits and credits have been accounted for. The ledger balance takes into account all transactions that have been posted to the account up to that point.
Learn more: What is the difference between credits and debits?
The purpose of ledger balance
The purpose of the ledger balance is to provide a snapshot of the actual balance of funds in a bank account at a specific point in time, after all transactions have been taken into account. It is also known as the current balance or the ending balance.
It is important for keeping track of the account’s overall financial position, ensuring that there are sufficient funds to cover expenses or payments, and meeting any minimum balance requirements or other criteria for maintaining the account.
What is available balance?
The available balance is the amount of money in a financial account that is currently available for immediate use or withdrawal. This balance takes into account any holds, pending transactions, or other factors that may affect the account balance, and represents the actual amount of funds that can be accessed at any given time.
The purpose of available balance
The purpose of the available balance is to show the amount of funds that are currently available for immediate use in a bank account, after taking into account any holds, pending transactions, or other factors that may affect the account balance.
It is important for managing your day-to-day finances, avoiding overdrafts or insufficient funds, and ensuring that you have enough funds available to cover your expenses and obligations.
Ledger balance vs available balance
The main difference between a ledger balance and an available balance is the timing of when the funds are available for use.
A ledger balance is the actual balance of your account, taking into account all the transactions that have been made, including those that are pending or have not yet cleared. This balance represents the total amount of money that you have in your account at any given time.
On the other hand, available balance is the portion of your ledger balance that you can access immediately. It reflects the funds that have cleared your account and are not subject to any holds or pending transactions.
In other words, the ledger balance represents all the money in your account, while the available balance represents the portion of that money that you can use right now.
Example of available balance vs ledger balance
Your available balance may be different from your ledger balance at any given time, as it takes into account any pending transactions or holds that are placed on your account. For example, if you have a ledger balance of $1,000, but $200 of that is on hold due to a pending transaction, your available balance will be $800 until the hold is lifted.
Pending transactions are transactions that have been authorized but not yet processed by your bank. For example, if you make a purchase using your debit card, the merchant may place a hold on your account for the amount of the purchase until it is processed. During this time, the held funds will be deducted from your available balance, but not from your ledger balance.
Similarly, your available balance may be affected by holds placed on your account by your bank, such as for check deposits or large transactions. These holds are designed to ensure that the funds are available and that the transaction will be processed successfully.
Why is ledger balance important?
The ledger balance is important because it gives you a comprehensive view of your account’s financial position. It provides your business with the information you need to make financial decisions.
Accurate tracking of account activity
The ledger balance provides a complete record of all transactions that have taken place in your account. This helps you to track your spending and income accurately and monitor any unauthorised transactions.
Helps avoid overdrafts
By tracking your ledger balance, you can ensure that you have enough funds in your account to cover your transactions and avoid overdraft fees.
Improved budgeting
Knowing your ledger balance helps you to budget your expenses effectively. You can see where your money is going and adjust your spending habits accordingly.
Planning for the future
With a clear understanding of your ledger balance, you can plan for future expenses or investments. You can see how much money you have available to save or invest and make informed decisions accordingly.
How to calculate your ledger balance?
To calculate your ledger balance, you need to take into account all the transactions that have occurred in your account.
Step 1: Start with your starting balance
Your starting balance is the balance of your account at the beginning of the period you are calculating for. This can be found on your bank statement or in your online banking account.
Step 2: Add all deposits
Add up all deposits that have been made to your account during the period, including direct deposits, cash deposits, and any other transfers.
Step 3: Subtract all withdrawals
Subtract all withdrawals that have been made from your account during the period, including ATM withdrawals, checks written, debit card purchases, and any other transfers out of your account.
Step 4: Add or subtract any fees or charges
If you have been charged any fees or service charges during the period, add or subtract these amounts to or from your balance, depending on whether they were debited or credited to your account.
Step 5: Check for any pending transactions
If you have any pending transactions or holds on your account, these will not yet be reflected in your ledger balance. You can check your available balance to see how much of your ledger balance is currently available for use.
By following these steps, you can calculate your ledger balance and get a better understanding of your account’s financial position.
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