What is meant by the term “balance?”
In banking language, this term refers to the amount of money you have remaining in your account.
Ledger balance can be defined as the balance which is in an account at the beginning of that day, also referred to as the current balance.
A ledger balance is calculated by the banking individuals at the end of each day. It includes every kind of transaction done on the previous business day, both, withdrawals and deposits. The summed-up amount calculated at night is the opening balance for the coming day.
Difference between Ledger Balance and Available Balance
Many times it is difficult for a layman to understand banking terms, thus it is commonly misunderstood that the available and ledger balance is the same.
The ledger balance does not change throughout the day. It is the amount that includes all the funds, even those which are still under process or unauthorized for use.
While available balance is dynamic, it represents the available balance for use at any point of the day. Available balance may or may not be different from the current balance since the current balance shows pending/ unprocessed transactions too.
Calculation of ledger balance
Ledger balance can be computed by summing up the closing balance from every working day for a specific month and divide it by the number of days in the said month. The closing balance of each day indicates every financial transaction done for the day, except the pending ones.
In a nutshell, it can be said that the ledger is calculated by summing up all credits and deducting debits from the opening balance of the day.
How does a ledger Balance Work?
The bank statement provided to a customer only shows the ledger balance to a particular date, cheques and deposits made after this date do not appear on it.
There are many uses associated with a ledger, for example, to determine whether an account holder maintains the required sum in order for it to remain operative or not.
Example to understand ledger balance
Individual A has a ledger balance of Rs. 500 on a particular day, from which Rs.300 is from a cheque that has not been cleared yet. In this situation A can only withdraw Rs.200 from his account.
Advantages of Ledger Balance
Debit and credit transactions are all we know about the banking industry but there are many more functions happening behind the scene.
- The double-entry system is applied easily with the help of a ledger since it records multi-fold aspects of every transaction. Double-entry in accounting is described as a system where each transaction is entered in two accounts, every entry in an account must have a corresponding entry in the opposite account.
- Analysis of total income and expenditure of a business can be done
- Visibility of financial status of a company or an individual
- Ledger is a two-step authenticated process, thus reducing chances of error
- Aids in management to provide information