While conducting business, an individual or the owner of the business needs to know what the account status of the business is, not every quarter or every year, but in fact every day. At the end of each trading day or a business session, a business owner usually takes stock of what happened through the day, the opening stock, and the closing stock. This process is known as checking the ledger balance of the business.
It is important to know that the opening balance, stock and cash at the end of the day matches with the closing balance. If this occurs, the ledger balance has matched and the accounts for the day are successful. If the ledger balance does not match, that means some error has been made either in the accounting entry of the stock or in the counting of the cash. To avoid incurring such instances, it is important to know the ledger balance at the end of every business day. Let’s discuss more about the ledger balance and the meaning of the ledger balance in the article.
What is ledger balance and what is the meaning of ledger balance?
Usually, computed by the bank a ledger balance is a total tally of the opening and closing balance of the business. It calculates all deposits, withdrawals and the cash already existing in the business and gives the closing amount for the day which is then used as the opening amount for the next working business. A ledger balance is used by the bank to know how much cash is available in the account and more on a daily day to day transaction of the business or the account.
A ledger balance is also referred to as the current balance since it gives a holistic view of the amount of cash that is available currently, at the time of checking the bank account.
However, ledger balance and available balance is not the same thing, though many may confuse it as synonyms of each other. There is a difference between ledger balance and available balance and we will address this in the next paragraph, so continue.
Ledger Balance vs Available Balance: What is the difference between the two
As mentioned above, the ledger balance is the current situation of the bank account after taking into consideration the opening balance, the deposits, withdrawals and then giving a closing balance for the day. In simple terms, a ledger balance is a closing balance given at any time during the day or at the end of a working business day.
On the other hand, available balance is the amount that includes the real time transactions that occur such as Automated Teller Machines [ATM] withdrawals and deposits, or any other transactions that are received from the bank. Available balance is the on-demand balance that is free to use for the customer or for the account holder.
Available balance is the balance that can be used immediately, at any given moment which can be used for immediate use. In simple terms, the available balance is the amount you see when you log into your bank account or the bank account app on your phone. It is the amount that is currently available.
The biggest difference between a ledger balance and an available balance is the free money that is there for use. The ledger account may not include cleared cheques and other transactions, whereas the available account has the amount available at the time of you checking your account.
From an accounting and business perspective, it is very important to know the difference between ledger balance and available balance, as it makes a difference in accounting entries and also a difference in the disposable cash that can be used in business activities.
How does a ledger balance work?
The main work of a ledger balance is done at the end of every working day as the objective is to calculate the opening account plus or minus all the deposits, withdrawals and other transactions that have occurred throughout the day and then come to a final closing balance. The closing balance figure that is arrived to at the end of the day is then used as the opening balance figure for the next working day and this is how the cycle continues for the ledger balance.
This figure is important as it takes into account the cheques, wire transfers, transfers that take over 1-2 days to reflect in the bank account and so on. It is difficult to get an immediate balance figure of the ledger balance, as the daily transactions are only calculated at the end of the day. This is why most of the ledger balances are available up to only a certain day preceding the current date to reflect the actual true account figure of the ledger balance. To know the immediate amount of an account, users then use this available balance, which is explained above.
Each bank account most of the time has a minimum monthly balance that needs to be maintained for the particular account. For example, a normal urban HDFC bank account requires a minimum monthly balance of INR 25,000 or INR 10,000 depending on the account to account. To calculate whether the monthly balance of the bank is marinated above average, the bank account uses the final ledger balance calculated every day to know whether the limit has been maintained, or not.
This is one of the biggest uses of a ledger balance since it gives the exact amount in the bank account after taking into account the cleared cheques, bank transfers, withdrawals and deposits, etc.
How to withdraw from the ledger balance account?
One of the most asked questions about the ledger balance is how does one withdraw from a ledger balance account. The main thing to know about a ledger balance account is that it does not reflect the latest transactions that are yet to be processed. Because of this, you can only withdraw how much ever you can see on your account balance and no more.
We will make this simpler with an example. Suppose, you have an account with INR 50,000 on it. One of your vendors has given you a cheque of INR 30,000 that you have deposited but the bank has not yet processed the transaction. You are under the impression that your bank balance is now INR 80,000 and will wish to withdraw that amount. However, since the cheque is not yet processed, the ledger account will reflect the newly added INR 30,000, but you will not be able to withdraw it. You will only be able to withdraw INR 50,000 and no more. Once the cheque has been cleared and passed, the available balance will change to INR 80,000 and only after that will you be able to withdraw the full INR 80,000.
In the above example, before the cheque is cleared the ledger balance is INR 80,000 however the available balance is INR 50,000 and since we’ve explained the difference between ledger balance and available balance before, one can only withdraw the amount that is immediately disposable which is the available balance. It is important to know that you do not get confused with the ledger balance and the available balance.
This is everything one needs to know about the ledger balance, its meaning, and above all the difference between ledger balance and available balance. Both the concepts can be confusing at times and will be interchanged.