Various financial transactions are carried out by individuals on a daily basis, usually through bank accounts. As time go by, the transactions can become complex. Banks and financial institutions use different financial terms in their identification of certain balances. “Ledger balance” and “available balance” are a couple of the terms used. When one sees these terms appearing on the bank statement, one may end up confused if not familiar with bank or accounting terms.
Also known as an “account balance,” the ledger balance is the balance existing in the account at the start of each business day. This balance can be seen on the bank statement. If you have an account that has interest-bearing properties, the ledger balance can be used in calculating the interest paid to your account. Additionally, if the bank account is the type where a minimum balance must be maintained, this amount may be used to prove compliance. At the close of a business day, the ledger balance includes any deposits made that day, the interest income earned that day (if applicable), and any types of withdrawals made that day from the account. Of course, that balance then becomes the ledger balance for the start of the next business day.
This is the balance that an individual can withdraw from the bank at any point in time. It is calculated by starting with the ledger balance and then subtracting any transactions due to occur that day on the account. Each time a financial transaction appears in the account, the available balance changes. As such, the available balance usually reflects the account movement that happens when a financial organization obtains details of a transaction. As a matter of fact, the available balance normally includes the available withdrawal amount and does not include checks written from the account or money deposited to the account during that period. It can also be defined as the ledger balance less any deposited checks that are not available for use by the account holder yet and also other credits which haven’t been posted to the account.
From the bank’s position, the available balance refers to a certain balance kept by the bank during a certain period of time. If one writes a check of a certain amount in that period of time, the account balance can become overdrawn by the amount of the check. The bank may return that check to you or the intended recipient for “insufficient funds,” depending on the policies of the bank.
The reason for such a delay on deposited checks is to allow time for the bank to get compensated by the check writer’s bank. Upon the transfer of cash or the processing of an electronic transaction, that amount is then made available to the holder of the account and is considered part of the “available balance.”
The main difference in these balances is the fact that financial institutions, such as banks, don’t release a certain period’s deposits in a bid to ensure its legitimacy. Among the deposits include deposits made at or after the end of working hours as well as “outstanding checks,” which are checks that have been written by the account holder but have not yet been received by the bank.
From a business perspective, the official ledger balance is the final amount after calculating the financial activities of the previous day. It combines the amount available and the amount pending withdrawal. While the available balance combines ledger balance and any other presented activity as electronic transactions outstanding (not processed yet), the available balance can be accessed whenever one requires it. Nonetheless, it is different with the ledger balance because that balance signifies authorized financial activities even though they have not actually been paid at the time.
It is crucial to gain an understanding of these two balances in order to avoid overdrawing one’s account. If, for instance, you write a check after just verifying the ledger balance, you may end up withdrawing more than the actual account balance existing after the processing of the day’s transactions, which can lead to overdraft charges. In the same way, if the ledger balance is used to verify account activity or a minimum balance, the account’s general financial performance may be incorrectly assessed.
As such, it can be stated with confidence that overdraft fees and needless charges may be avoided if the account holder efficiently keeps track of all deposits and withdrawals made to the account and keeps in mind the time element used by the bank to post the transactions. For better account management, computerized programs and accounting applications are beneficial tools for this purpose.