In banking, it’s common to come across different types of balances when reviewing your account. One of the most important yet often misunderstood terms is the ledger balance. This is the balance in your account as per the bank’s official records. It is at the end of a business day after all confirmed credits and debits have been processed. The balance recorded in the ledger is constant at any point throughout the day as the bank reconciles it at the end of business, whereas available balance updates in real time with every business transaction made.
Just as an individual, a company also understands the maintenance of the ledger balance. Keeping it helps in paying the clearance transactions, as well as avoiding overdrafts, and also helps in maintaining a good record with updated finances.Whether you’re writing cheques, reconciling bank statements, or applying for a loan, knowing your ledger balance ensures you’re working with the most reliable figure recorded by the bank.
What is Ledger Balance?
The ledger balance is the balance available in a bank account at the end of a business day after all credit and debit transactions have been processed. It represents the official recorded balance in the bank’s ledger. This balance does not reflect transactions made during the current business day until the bank reconciles all records overnight.
For example, if your account had a balance of ₹20,000 on Monday and you withdrew ₹5,000 on Tuesday morning, the ledger balance would still show ₹20,000 until the bank updates it at the end of Tuesday. The actual change due to your withdrawal will be visible in the available balance but not yet in the ledger balance.
This balance is important in accounting and financial reporting because it shows the last confirmed balance as per the bank’s books. Businesses, banks, and auditors use it as a reference for financial accuracy and historical record-keeping.
Ledger Balance vs Available Balance
Often used synonymously, “ledger balance” and “available balance” are two terminologies that do not mean or act the same way in a banking context. Knowing how to distinguish one from the other will help an account holder avoid overdrawing, control spending, and even read a bank statement correctly.
Ledger Balance
The ledger balance reflects the balance in your account at the end of the previous business day. It includes all the cleared deposits and withdrawals made before the bank’s cut-off time. Once the bank closes its books for the day, it records the final amount in your ledger. This balance stays fixed throughout the next business day until the bank reconciles new transactions again.
For example, if you deposited a cheque on Tuesday morning, it won’t appear in the ledger until it clears and the bank processes it, usually the next day or later.
Available Balance
The available balance is the amount of money you can use right now. It includes all transactions that have been processed in real time, including pending deposits, card payments, auto-debits, and mobile banking transactions. This balance changes throughout the day as you swipe your debit card, transfer money, or make any online payments.
Unlike the ledger balance, which is updated once daily, the available balance is dynamic and constantly changing with each transaction.
| Criteria | Ledger Balance | Available Balance |
| Update Frequency | Once a day (end of day) | Real-time updates |
| Includes Pending Transactions | No | Yes |
| Can it be used for withdrawals? | Not always | Yes, always |
| Visibility | Seen on bank statements | Seen in online/mobile banking |
| Usage | Bookkeeping, auditing, loan review | Daily usage, spending decisions |
How to Compute Ledger Balance
Calculating the ledger balance is a straightforward process, but it requires understanding how credits and debits affect the account. The ledger balance is calculated by adding all the transactions that have cleared the account.
Formula:
| Ledger Balance = Opening Balance + Total Cleared Credits – Total Cleared Debits |
Here’s a breakdown of each term:
- Opening Balance: This is the ledger balance carried over from the previous day. It serves as the base for computing the new day’s ledger balance.
- Cleared Credits: These include all amounts that have been officially added to your account, such as salaries, NEFT/RTGS transfers, interest income, and cleared cheque deposits.
- Cleared Debits: These are all processed payments, such as debit card purchases that have cleared cheque payments, bank charges, or auto-debits like loan EMIs.
Example:
Let’s assume your opening ledger balance on Monday is ₹50,000. During the day, the following transactions occur:
- ₹20,000 credited as salary (cleared)
- ₹5,000 cheques issued to a vendor (cleared)
- ₹2,000 deducted as EMI (cleared)
- ₹3,000 cash withdrawal at ATM (cleared)
Now, the ledger balance at the end of Monday is calculated as follows:
₹50,000 + ₹20,000 – ₹5,000 – ₹2,000 – ₹3,000 = ₹60,000
This ₹60,000 becomes your ledger balance for Tuesday until any new transactions are cleared and processed.
Any transactions made on Tuesday (e.g., you swipe ₹1,000 at a shop) will not be reflected in the ledger balance until the day ends and banks reconcile the accounts.
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, which shows the amount available for such items. See how it works:
Recording Transactions
Deposits and Withdrawals: When a customer deposits money into their account, the ledger balance is immediately increased. Conversely, withdrawals or purchases reduce the ledger balance.
Fees: 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 records of transactions, customers can ensure that the bank’s record matches their account activity.
Significance of Ledger Balance
The balance in the ledger is not merely a figure in your bank statement. It is extremely important in banking, accounting, and financial reporting. Here’s why:
1. Accounting and Bookkeeping
Companies depend on ledger balances in order to reconcile their cash books with bank statements. The balance is an audited account of all transactions that have been processed and hence is very important for reconciliation and audits.
2. Loan and Credit Approvals
When you request a loan, the bank can review your ledger balance to determine your past financial conduct. Having a steady ledger balance over the long term indicates financial stability and can enhance your approval prospects.
3. Avoiding Overdrafts
By knowing your ledger balance, you can avoid issuing cheques or making payments that may bounce due to insufficient funds. Since some pending transactions don’t show up in the ledger, relying on the ledger balance for withdrawals might result in unintended overdrafts.
4. Bank Charges and Limits
Some banks impose minimum balance requirements based on the ledger balance rather than the available balance. If your ledger balance falls below this limit—even temporarily—you could be charged a penalty.
Ledger Balance FAQs
Q1. Can I withdraw based on the ledger balance?
Not always. Since the ledger balance doesn’t include pending deductions, you might withdraw more than what’s actually available, leading to overdrafts or declined transactions.
Q2. Why is my ledger balance higher than the available balance?
This usually happens when pending payments or holds (like debit card transactions or cheque clearances) haven’t yet been posted. The funds are technically reserved, reducing your available balance.
Q3. Is the ledger balance updated in real time?
No. The ledger balance is only updated once every business day, usually at the end-of-day batch processing by the bank.
Q4. Can the ledger balance be negative?
Yes. If your account is overdrawn (e.g., through auto-debit or cheque bounce), the ledger balance can become negative, indicating a liability or owed amount to the bank.
Q5. Does the ledger balance include cheque deposits?
Only cleared cheques are included. If a cheque is deposited but not cleared, it will not appear in the ledger balance until the clearing process is complete.
