As a business owner, you will come across several specific terms used by financial institutions, such as ledger balance or available balance. While the financial terminology can be overwhelming, it is crucial to understand what these concepts refer to. Keep reading for our short guide to what a ledger balance is, how it is calculated, what the difference between ledger, available, and trial balance is, and why it is important.
What is Ledger Balance?
Ledger balance refers to the remaining balance at the end of the business day, as well as the starting balance at the beginning of the next business day. It changes at the end of business days depending on solely the transactions, deposits, and withdrawals completed on that specific day. Any incomplete transactions that have been started are not considered in the ledger balance. You can find this balance on a bank statement.
The ledger balance is often referred to as the current balance and differs from the available balance (see below). In accounting, the ledger balance is used in the reconciliation of book balances.
The concept of a ledger balance is important to understand because businesses should usually only make payments according to how much their ledger balance is.
How is Ledger Balance calculated?
To calculate your ledger balance, you need to follow three simple steps.
Note your opening balance
Look at your business's bank account and identify your ledger balance at the start of the day. This is what is called your opening balance.
Add all credits
Add all payments that you are certain will be processed to your opening balance. This can eg include financial transactions from a customer or deposits you have made yourself.
Subtract all debts
Then, from the sum calculated, subtract all debts that have been made during the day (that you are certain will be withdrawn from your account balance).
Once you have completed the steps above, you have arrived at your ledger balance.
What is the difference between ledger balance and available balance
- The ledger balance describes the actual amount you have, while the available balance refers to the potential amount you have once all as yet unprocessed transactions have been completed.
- This means that the available balance changes frequently throughout the day as transactions hit the bank accounts of a company. The ledger balance, however, does not include real-time transaction updates and therefore remains the same throughout the day.
- While neither ledger nor available balance includes outstanding checks just written from the account, the latter updates for ATM withdrawals, deposits, and other transactions.
A business owner needs to understand the difference between the ledger and the available balance. Financial institutions rarely transfer funds immediately following a transaction. Some payments can take certain amounts of time before reaching the intended account holder. For some businesses, this affects their ability to plan with their finances, as they have to wait several days after receiving payment for it to show. For businesses like that, the available balance is a great tool to identify much money they have in total once all outstanding incoming and outgoing payments have been processed.
The difference between the two types of balance is important to understand because a business should only make payments according to its ledger balance as it is the actual amount it has. The available balance, on the other hand, is the potential amount it has once all as yet unprocessed transactions have been completed.
What is the difference between ledger balance and trial balance?
The trial balance describes a statement of debit and credit balances that are extracted from ledger accounts at a specified time. It acts as a foundation to create financial statements for the business.
There is several key differences between the ledger and trial balances:
- Usage: While the general ledger is used as the main source to investigate accounts and determine what the actual amount is a business has on its bank account, the trial balance is used to compare all debits and credits to verify that the books are in balance.
- Information contained: While the general ledger contains the detailed transactions comprising all accounts, the trial balance only contains the ending balance in each of those accounts.
- Type of information: The general ledger holds about accounting transactions, while the trial balance is just a report that is derived from the general ledger.
Why is ledger balance important?
When looking at your company's bank account balance, you might not be presented with the most up-to-date information. The same principle applies to bank statements - any transactions completed after the statement date will not be included.
This is why, to ensure you are working with the most up-to-date balance available, it is important to keep your records up to date and calculate your ledger balance.
Ledger Balance Example
Company A starts the working week with a balance of GPB 1,500 in their checking account. On Tuesday, Company B issues a check over GPB 1,000 to Company A. The cheque gets cashed in at Company A's bank the same day. However, it will not show on their ledger balance on Tuesday. It will only show on Company A's ledger balance on Wednesday evening the earliest, once the money has arrived in their bank account.
Ledger Balance FAQs
- How do I withdraw the ledger balance?
It is possible to withdraw funds from your ledger balance, however, it is advisable to check your available balance to see if the funds are present. When withdrawing, you always immediatly withdraw from your ledger balance. When you withdraw money, it shows a debit. This withdrawal will be shown in your ledger balance but there will be no change in the available balance until money is debited from your account.
- How do I convert ledger balance to available balance?
The ledger balance, as opposed to the available balance, does not include real-time transaction updates and therefore remains the same throughout the day. So, to change your ledger balance to the available balance, amend the ledger balance to account for the transactions that hit the bank during the day.
- How long does it take for the ledger balance to be available?
A ledger balance is available and computed by a bank at the end of each business day.
- Is the ledger balance my money?
The ledger balance describes the actual amount of money you have. The available balance, on the other hand, refers to the potential amount you have once all as yet unprocessed transactions have been completed.
- What does the ledger balance mean in my bank account?
Your ledger balance refers to the remaining balance at the end of the business day, as well as the starting balance at the beginning of the next business day.
- Why is my ledger balance more than my available balance?
Because a ledger balance does not change throughout the day, whereas the available balance accounts for all withdrawals (and payments) that hit the bank throughout the day and can therefore change and decrease.
- What does it mean if my ledger balance is negative?
The credit or negative balance in the checking account is usually caused by a company writing checks for more than it has in its checking account.