If you are the owner of a bank account, you are familiar with the word ‘Balance’. Balance is the total sum of assets that is in your bank account.
Your bank owes this amount to you. So, as long as you have an account balance, you can use the money at any time. You can use it for bill payments, making purchases, etc.
However, you should be aware of the fact that balance is not always constant.
The balance of your account can change depending on some conditions. Two types of entries can change the total balance in your account.
These Entries Are!
- 1 What is Available Balance?
- 2 All You Need to Know About Ledger Balance:
- 3 How Do Banks Calculate Ledger Balance?
- 4 How Does Ledger Balance Affect Your Financial Planning?
- 5 What Is An Overdraft?
- 6 Wrapping It All Up!!
1. Debit Reports:
Debit reports comprise all the money that comes into your account. This money can be a deposit that you have made.
It can also be an online transfer TO your account, or even depositing a check into your account. Thus, debits will increase the balance available in your account.
2. Credit Reports:
Credit reports give you information on the money that leaves your account. This money can be a withdrawal you have approved.
It may also be a transfer FROM your account or a purchase you have made from your credit card. Having credit reports will decrease the total balance available in your account.
Therefore, the net balance available is the sum of the total debits and credits you have. This information is crucial to determining your financial position.
It can also determine your net worth. A positive balance means that the bank account owes you money.
You can utilize this money any time you want in any way. However, if the balance in your account is below the equation, this means that you owe money to the bank.
The bank provides this money to you in the form of loans. You have to repay the money to your bank at an interest rate.
Therefore, you need to make sure that your balance always remains on the positive side of the count.
What is Available Balance?
The bank updates the total balance in your account regularly. The bank gives you this information by your available balance.
With each credit or debit report, the bank updates the available balance in your account. Therefore, your available balance tells you the exact amount present in your account.
All You Need to Know About Ledger Balance:
Is ‘Available Balance’ the only kind of balance in your account?
The answer is NO. There is one more kind of balance. This is the ‘Ledger Balance’. Ledger Balance tells you about the total amount present in your account when the day starts.
This type of balance does not change throughout the day. It only changes when the bank updates it at the end of each day.
Comparison of Available Balance and Ledger Balance:
Both balances represent your bank statement. But, there is a slight difference between both of the balances.
The available balance gives you the updated information regarding your bank statement.
However, the ledger balance is not the most updated version.
The ledger balance constitutes the net balance present at the start of each day. However, this amount remains does not change a bit throughout the day.
No matter how many credits or debit reports you have in the day, the ledger balances remain the same.
However, the ledger balance is not infinitely constant. The bank updates them when the working day ends.
The bank takes into account all your debit and credit reports for the entire day.
Once your ledger balance updates, it is the amount that is present at the beginning of the next day.
How Do Banks Calculate Ledger Balance?
The banks calculate the ledger balances in a similar way to what I have mentioned earlier.
The ledger balance remains constant, despite any credit or debit reports that may have ensued.
The bank regularly updates the available balance with each deposit or withdrawal.
However, these changes do not always represent the correct situation of your account.
You might wonder why that is…
It is because there can be a difference between the available balance and the actual balance. The transactions or deposits might not receive approval.
This can be troublesome when you want to determine where you stand financially.
That can be quite a big problem, right?
This is where the ledger balance comes in. By the days’ end, the bank makes use of all your reports.
The calculation of ledger balance occurs in the following steps:
1. Taking the Initial Amount at The Start of The Day:
This is the ledger balance amount that the bank updated at the end of the previous day. It tells the bank exactly what they have to start with.
2. Adding All the Debits:
The debits represent the money that increases the balance of your assets. The bank takes into account all the changes that have taken place within the day.
This amount adds to your initial balance.
3. Subtracting the Credits:
How Does Ledger Balance Affect Your Financial Planning?
The ledger balance has a significant effect on your financial planning. This is especially true if you are active and cash flow to and from your account is regular.
And why is that?
As I have told you earlier, the ledger balance represents the initial amount you have at the start of each day.
So, if you have some debits or credits, the ledger balance will still not change. Therefore, it might not represent the actual balance.
Contrarily, the available balance updates throughout the day with any report. Therefore, you should use the available balances to determine your financial situation.
Also, you should make further financial plannings based on the available balance report.
Does Ledger Balance Have No Benefit at All?
You should keep a check on your available balance. But, you must not infer from it that you should not acknowledge the ledger balance.
This is because relying on Available Balance can be risky.
You might wonder why that is…
This is simply because most credit or debit reports are not absolute. The available balance shows you the updated balance.
But this record is unofficial. The reason being there are time differences between a report and the actual movement of money. This difference in time can go up to several days.
This means that if you rely completely on available balance, you might get careless. You might end up spending more money than you need to spend.
Your balance will go below a certain limit which will further develop more problems.
Even if you don’t go overdraft, you can still end up on low finance overall.
What Is An Overdraft?
Let’s suppose your bank account goes overdraft. With an overdraft, you will end up owing money to the bank. That amount also comes with a huge amount of interest.
Also, your APR will take a huge impact because of it. Thus, your monthly interest will keep on increasing until you pay off your debts.
Also Read: Palmcredit Loan: Is it Real? A Guide in 2021
Wrapping It All Up!!
Now you know all about ledger balance. I have told you the differences between the types of balances in bank terminology.
Keeping a check on the ledger balance can be very crucial to your financial planning process.
This is because it is always the safer and risk-free option when you need to make a decision.
This is not the case for available balance which provides untimely information.
However, this does not essentially mean that you should ignore the available balance as well. Since you will be spending some hard-earned money, you should not take risky steps.
If the available balance is lesser than the ledger balance, you might want to be careful. Since you probably don’t have the amount that your ledger balance shows.
So you probably need to be cautious in such situations.
All in all, you should keep a regular check on both of the balance reports if you want to make effective decisions.
I hope you have a better understanding of ledger balances and how you can utilize them.