What is an Account Balance?
Definition: An account balance is the difference between the debits and credits posted to the account during the current accounting period plus the beginning balance. Not all accounts maintain balances from one accounting period to the next. Temporary accounts are closed at the end of each accounting cycle to permanent accounts, which carry the balances on to the next accounting period.
All accounts have either a debit or credit balance. Keep in mind that this does not mean a positive or negative balance. Instead, a debit refers to entries in a t-account on the left side while a credit is an entry on the right side.
An account balance is the amount of money present in a financial repository, such as a savings or checking account, at any given moment. The account balance is always the net amount after factoring in all debits and credits. An account balance that falls below zero represents a net debt—for example, when there is an overdraft on a checking account.
What Does Account Balance Mean?
An account balance shows an individual’s total assets less total liabilities. Sometimes, this can be referred to as an individual’s net worth or total wealth because it subtracts any debts or obligations from positive sums. For specific accounts at a financial institution, such as a checking account or brokerage account, the account balance will reflect the current sum of funds or value of that account. For investments or other risky assets, the account balance will tend to change over time as security prices rise and fall in the market.
Asset accounts have debit balances while liability and equity accounts have credit balances. There are a few exceptions to this rule, however. Contra accounts have a balance opposite from their classification. In other words, a contra asset account actually has a credit balance and a contra equity account has a debit balance. These contra accounts reduce their associated category level.
Account balances are calculated by starting with the beginning balance. The debits are totaled, the credits are totaled, and all three are combined together. This is the ending account balance.
It’s easiest to see the calculation with a t-account. Let’s look at the cash t-account for example. This account has a beginning debit balance of $3,000. During the accounting period, the company used $1,000 to purchase a vehicle. The $1,000 purchase is recorded as a credit and reduces the overall cash balance.
The ending balance in the cash account equals a debit of $2,000 (the beginning $3,000 minus the $1,000 credit). As you can see, the difference between the debits and credits including the beginning balance equals the account balance.
Temporary accounts like income and expenses accounts don’t have beginning balances, so their ending balance is just the difference between the debits and credits of the current period.
Finding Your Account Balances
In banking, the account balance is the amount of money an individual has available in his checking or savings account. The account balance is the net amount available to the person after all deposits and credits have been balanced with any charges or debits. Sometimes an account balance does not reflect the most accurate representation of an individual’s available funds, due to pending transactions or checks that have not been processed.
For example, if a starting checking account balance is $500, and the account holder received a check for $1,500, and also wrote a check or scheduled an automatic payment for $750, then his account balance might show $2,000 immediately, depending on the banking establishment. However, the true account balance is $1,250. It is important to keep track of account balances by recording every credit or debit to ensure the most accurate picture of the account.
Many other financial accounts also have an account balance. Everything from a utility bill to a mortgage account needs to have an account balance to show an individual consumer the balance of his account. For financial accounts that have recurring bills, such as a water bill, the account balance usually shows the amount owed.
Account Balance vs Available Credit
For credit cards, account balances are the total amount of debt owed at the start of the statement date. The account balance on a credit card also includes any debt rolled over from previous months, which may have accrued interest charges. Available credit is the term used alongside the account balance to indicate how much of the credit line the account holder has left to spend.
For some bank accounts, deposits may not clear in whole or in part immediately and may take up to a few business days to show up in your account. In such situations, the bank will usually indicate to you the current available balance alongside the unavailable amount that is waiting to clear.