Ledger Balance Meaning
A ledger balance is an opening balance that remains available during the start of each business day. It comprises all the deposits and withdrawals used to calculate the total funds left in an account at the end of the previous day.
It is different from the memo balance and the customer’s available balance. The bank calculates it at the end of every business day, including debit and credit transactions. Ledger balance keeps the banks updated with the currently available funds.
Table of contents
- Ledger Balance Meaning
- How Does Ledger Balance Work?
- How To Calculate?
- Examples
- How To Withdraw?
- Importance
- Ledger Balance vs Available Balance
- Ledger Balance vs Memo Balance
- Recommended Articles
How Does Ledger Balance Work?
The ledger balance is the opening balance reflected in the bank account at the beginning of a business day and remains unchanged for the entire day. It is different from memo balance and the customer's available balance. The bank calculates it at the end of every business day, including debit and credit transactions. It is always vital for account holders to keep their records up to date since neither the bank statements nor online banking reflects the updated information.
All of these accounts are assigned a particular account number. These accounts are divided into various groups, such as liabilities, assets, revenues, equities, and expenses. Some of these accounts have credit balances, while others have debit balances. All of these accounts are divided into different groups. The asset and expense account has a normal debit,while the liability, equity, and revenue account has a normal credit balance.
A ledger balance is regularly updated at the end of each business day after the approval and processing of all financial transactions. It represents the account's closing balance as an opening balance for the very next business day. This balance is calculated by banks once all the financial transactions such as interest income, deposits, cleared checks, wire transfers, debit transactions, cleared credit cards, etc., are posted and rectified for errors.
How To Calculate?
A ledger balance can be calculated by combining the closing balance from each business day for a particular month and dividing the result by the number of days from a specific month. The closing balance of a business day reflects all the financial transactions posted that day and all the pending financial transactions not yet posted. In other words, it can be calculated by adding all the credits and deducting all the debits made from the opening balance of the day.
Examples
Let us consider the following examples to understand what is a ledger balance and how it can be checked and calculated:
- A has $400 as a ledger balance, out of which $300 belongs to a check that he has recently deposited. The deposited check is still kept on hold. In such a case, A can withdraw only up to $100 from his bank account.
- A has $100 as his ledger balance. His credit total for the day is $25, which he has deposited at his local branch. His debit totals for the day are $10 that he has withdrawn at an ATM—his balance totals $115.
How To Withdraw?
No, one can take out only what is available. Some items like debit cards that are used as “charge cards” are not immediately reflected, and hence one can only withdraw and spend the amount available in their bank account. For example- A has $5,000 as a ledger balance, but the available balance is only $3,000. It means A can withdraw an amount equal to or less than $3,000.
Before making a withdrawal, one must always look at their available balance. One must not decide based on ledger balance as the same is not frequently updated. On the other hand, the available balance is regularly updated, and it includes updates concerning real-time transactions.
Importance
A ledger balance is a balance accounted for to provide individuals and entities with the latest and most updated information, based on which they can conduct their financial planning, including budgeting. The points below show how this balance is important.
- It is the opening balance and not the closing balance for any business day. Like the customers' available balance, the closing balance for the ledger balance is generally calculated at the end of a business day.
- Account holders may not necessarily get access to recent and updated information on mobile or net banking. Only a few banks display both the available and current balances, which allow customers to tell how much funds they have consumed at their disposal.
- Even the bank statements are not reliable enough. As stated earlier, balances displayed on bank statements are derived from ledger balances on a statement date. Transactions like withdrawals, deposits, written checks, etc., conducted after the statement date will surely impact the available balance.
- One must always ensure that they are taking the most recent balance into use at all times, and therefore, the records must always be kept updated for the same purpose.
Ledger Balance vs Available Balance
Ledger balance and available balance are two terms that are often confused. Listed below are some of the differences between the ledger balance and the available balance.
Let us have a look at them:
- Customers' available balance is the aggregate amount of funds accessible for withdrawal purposes at a particular point in time. In contrast, a ledger balance is an opening balance available at the start of a business day.
- This balance may not change that frequently compared to the available balance since it keeps fluctuating very often throughout the business day as financial transactions occur for a particular bank account.
- This balance is not updated frequently for real-time transactions, while the available balance is continuously updated.
- It is the opening balance and is updated only at the day end. In contrast, the available balance can be calculated by deducting check holds, permanent holds, and temporary holds from the ledger balance.
- Unlike available balance, ledger balance doesn’t comprise debits and credits earned from transactions not yet posted to bank accounts.
Ledger Balance vs Memo Balance
Ledger balance and memo balance are both studied as mentioned in the financial transactions. However, they differ in various aspects, some of which have been mentioned below:
- Ledger balance considers all the financial transactions, such as cleared checks, finalized debit card transactions, etc., that are officially posted.
- On the other hand, the memo balance shows the account balance, taking into account all financial items when they hit the holder's bank account.
Recommended Articles
This has been a guide to Ledger Balance and its meaning. Here, we explain it with vs available balance, how to withdraw it, examples, vs memo balance. You can learn more about accounting from the following articles –
- Cash Memo
- Bank Reconciliation Meaning
- Subledger
- Examples of Ledger Account
- Cook the books
