It refers to the amount of money that is available in a bank account at the end of a specific day after accounting for all transactions, including deposits, withdrawals, and charges. It represents the balance as recorded in the bank’s internal ledger, which may not reflect recent transactions, such as pending deposits or withdrawals, that have not yet cleared. The ledger balance follows a customer’s account for the activities that have happened during any given period; hence it is usually balanced at the end of any business day.
What Is a Ledger Balance?
A Ledger Balance refers to the balance in a bank account at a given time after all posted transactions, including credits (deposits) and debits (withdrawals or fees), have been recorded by the bank. It, therefore, reflects the balance as reflected in the bank’s ledger at any point in time.
Unlike the balance in a checking account or checking type of account where one needs to consider some unprocessed transactions, that of a ledger balance excludes those, as it covers completed transactions. The ledger is generally updated at the close of business day, and it appears on the bank’s accounts until another set of transactions occur.
Key Features of Ledger Balance:
- Fixed Amount: The ledger balance represents the amount in the account after all completed transactions are processed.
- Non-Reflective of Pending Transactions: It does not include any pending transactions, such as holds, uncleared checks, or incoming deposits that are yet to be processed.
- Updated Periodically: The ledger balance is usually updated once per day, reflecting only the transactions that have fully cleared.
The ledger balance allows account holders to have knowledge of the actual money that can be used and, in turn, avoid confusion from the available balance. For instance, the available balance may be higher due to pending transactions.
Formula and Calculation of Ledger Balance
The ledger balance is computed by first taking the opening balance at the beginning of the day and then adding or subtracting any postings of completed transactions that have been accrued during that day. The formula to calculate the ledger balance is as shown:
Formula for Ledger Balance
Where:
- Previous Ledger Balance: The balance in the account at the end of the previous day or the last update.
- Deposits/Credits: Any deposits made into the account, including checks or transfers that have cleared.
- Withdrawals/Debits: Any withdrawals or payments made from the account, such as checks, bills, or ATM withdrawals, that have cleared.
Example of Ledger Balance Calculation
Let’s assume the following account details:
- Previous Ledger Balance: $1,000
- Deposits (Checks, Transfers): $500
- Withdrawals (ATM, Checks, Fees): $300
In this case, the ledger balance at the end of the day would be $1,200.
Importance of Ledger Balance:
- Accurate Reflection of Cleared Transactions: It reflects only the transactions that have been fully processed and posted by the bank.
- Bank’s Official Record: The ledger balance is the bankās official record, used to prepare statements and track account activity over time.
Understanding how the balance is calculated in the ledger would help account holders tell funds that are immediately available from the funds that are tied up as a result of pending transactions.
How a Ledger Balance Works?
The ledger balance works on the basis that all completed transactions are reflected in an account, irrespective of the timing of other unprocessed transactions. Therefore, in some cases, the ledger balance will be different from the available balance-what shows the amount available to such items. See how it works:
Recording Transactions
- Deposits and Withdrawals: When a customer deposits money into their account, it immediately increases the ledger balance. Conversely, withdrawals or purchases reduce the ledger balance.
- Fees and Charges: Bank fees, such as monthly service charges or overdraft fees, are deducted from the ledger balance once they are posted.
No Reflection of Pending Transactions
- Pending transactions, such as checks written but not yet cleared or deposits not yet posted, are not included in the ledger balance. For example, if a check is deposited but not yet processed by the bank, it will not appear in the ledger balance.
Daily Update
- The ledger balance is updated periodically (usually at the end of the day) to reflect all completed transactions. This provides a snapshot of the account at a particular point in time, typically at the close of banking hours.
Access to Funds
- The ledger balance gives an accurate picture of the account’s funds based on all cleared transactions. However, if a customer has pending deposits or withdrawals, the available balance may differ, as it considers those future transactions.
Use for Reconciliation
- Account holders use the ledger balance for reconciliation purposes. By comparing the ledger balance with their own records of transactions, customers can ensure that the bank’s record matches their account activity.
Understanding the difference between ledger balances and other types of balance, such as the available balance, will help to track the funds more clearly and avoid overdrafts, missed payments, and so many other issues.
Ledger Balance vs. Available Balance
Understanding the difference between the ledger balance and the available balance is important for people to manage their personal and business finances. Both terms refer to the same balance in a bank account but differ in what they contain and how they reflect the customer’s access to money.
Ledger Balance
- Definition: Represents the total balance in an account, including only completed transactions that have been fully processed by the bank.
- Includes: Only fully cleared deposits, withdrawals, and fees.
- Use: Reflects the official, up-to-date balance in the account according to the bankās records at the end of the business day.
Available Balance
- Definition: Represents the amount of money that is available for withdrawal or use at a given moment, considering both cleared and pending transactions.
- Includes: Cleared transactions, as well as pending deposits or withdrawals that have not yet been processed.
- Use: Shows how much money is accessible to the account holder at that moment, taking into account pending transactions.
Key Differences
- Pending Transactions: The available balance accounts for pending transactions, while the ledger balance does not. This means that a customer’s available balance might be lower than the ledger balance if there are pending payments or deposits.
- Access to Funds: The available balance shows the actual funds that can be accessed immediately, whereas the ledger balance may reflect money that is not yet available for use due to pending transactions.
Example of Ledger Balance vs. Available Balance
- Ledger Balance: $1,500 (reflecting all completed transactions)
- Available Balance: $1,200 (reflecting $300 in pending checks or transfers)
In this example, the account holder has $1,500 in total, but only $1,200 is available for withdrawal or use due to pending transactions.
Conclusion
In simple words, the ledger balance is the sum of the amount in a bank account after all the completed transactions have been processed and recorded. It is an important figure for understanding the financial standing of a business or an individual, but it differs from the available balance, which includes pending transactions. Knowing the difference between these balances helps individuals and businesses manage their accounts effectively, making sure they have a clear view of their financial position.
What is Ledger Balance ?FAQ
What is Ledger Balance?
Ledger Balance refers to the total balance in a bank account after all completed transactions have been recorded, but excluding any pending transactions.
How is Ledger Balance different from Available Balance?
The ledger balance represents the total amount of money after all cleared transactions, while the available balance reflects the money available for withdrawal, including pending transactions.
Why is the Ledger Balance important?
The ledger balance is important for understanding the actual state of an account based on completed transactions and serves as a key figure for reconciling accounts.
Can the Ledger Balance be used to determine how much money I can withdraw?
No, the ledger balance may not reflect pending transactions, so the available balance is a better indicator of the amount you can withdraw.
How often is the Ledger Balance updated?
The ledger balance is typically updated at the end of each business day to reflect all completed transactions.
