In the past, entities transacted in cash. However, this process had various limitations and challenges. The most crucial of these included the security of the cash resources. Similarly, it involved taxation issues and the unavailability of a trial. However, banking transactions solved most of those limitations. These transactions involved using an accumulated account balance to make and receive payments.
Furthermore, companies have several financial statements, which reveal details about their operations. The two most prominent ones among them include the Statement of Financial Position and Statement of Profit or Loss. The former, also known as the balance sheet, contains a list of account balances that companies accumulate over the years.
Both of the above paragraphs touched on the topic of account balances. However, they discussed the concept under two separate fields or areas. Most people confuse the term without considering the context. Overall, the definition of account balance differs in accounting and banking. Therefore, it is crucial to understand what an account balance is under both of these areas.
What is an Account Balance in Banking?
In banking, the term account balance refers to the overall funds available in a financial account. As mentioned, businesses, companies and individuals use bank accounts to facilitate transactions. These accounts provide an alternative to the traditional cash transaction options. Entities may use various types of bank accounts to accumulate funds and use them to make and receive payments.
The process of accumulating an accounting balance in banking involves several steps. The first involves opening or registering a bank account. This account provides an individual identity to an entity, allowing them to separate their funds from others. For the bank, this account makes the customer unique and makes transacting with them straightforward.
The next step involves receiving payments into the bank account. These payments accumulate in the customer account, becoming a part of the funds available in it. The more funds an entity receives in this account, the higher their account balance will be. However, this account balance does not only include any receipts in the bank account.
The account balance in banking also involves payments made from a bank account. However, any amount paid from these accounts constitutes a negative cash flow. Therefore, it reduces the overall balance in the bank account. These payments may also include expenses or charges made by the bank. Usually, however, they consist of amounts paid to other parties or cash withdrawals.
In some cases, entities may also obtain a loan from a bank. In those cases, they will also get a bank account. However, in those cases, the account balance will not be the same. Instead of representing the cash to spend, it will refer to the amount payable by the entity to the bank. However, this definition only applies to loan accounts instead of savings or checking accounts.
Overall, an account balance in banking represents the total amount of money an entity has in its bank account. As mentioned, this may include checking or savings accounts. It shows the balance after reducing all payments made from the receipts into the bank account. This balance also represents how much money is available for the entity to spend.
Example of Account Balance in Banking
A company, ABC Co., has a bank account with XYZ Bank. The company uses this current account to pay suppliers and receive cash from customers. Currently, ABC Co. holds a bank balance of $50,000 in this bank account. The company received a bank statement for the last period, which contained a summary of the account balance in this account. This statement is as below.
|Date||Description||Payments (Dr.)||Receipts (Cr.)||Balance|
In the above bank statement, the debit sides constitute payments made by ABC Co. However, in the general ledger, these will be on the credit side. Similarly, the credit side includes the receipts into the account. The company’s general ledger will record these on the debit side. Overall, the $50,000 balance represents the remaining money available for spending in the bank account.
What is an Account Balance in Accounting?
The term account balance applies to both banking and accounting, as stated above. However, it is more prevalent in the latter area. An account balance in accounting represents the difference between all the debit and credit transactions in a ledger account. These accounts may exist for assets, liability and equity. For all of these, the account balance will represent a different meaning.
For assets, account balances are usually debit balances. These represent a resource owned or controlled by an entity that may cause inflows of future economic benefits. Usually, assets include more debit transactions than credit ones. Therefore, they will have a positive balance, assuming debit transactions to be positive.
When it comes to liabilities and equity, account balances usually include credit balances. For liabilities, these balances represent obligations due to past transactions resulting in outflows of economic benefits. For equity, they will be the amount distributable to owners or shareholders from an entity’s operations. This amount will come after deducting the entity’s liabilities from its assets.
Overall, the above rules apply to all assets, liabilities and equity balances that companies may have. However, there may be some exceptions to these rules, for example, contra accounts. In those cases, the opposite treatment will occur for each item. For instance, contra asset accounts accumulate credit balances rather than debit.
Account balances in accounting are a part of a company’s Statement of Financial Position. Another name used for this statement is the Balance Sheet. This term refers to the financial statement, which includes an accumulation of various account balances. The balance sheet categories those account balances under the assets, liabilities and equity headings.
Example of Account Balance in Accounting
A company, ABC Co., prepares all the required financial statements. In the company’s balance sheet, ABC Co. reports various account balances. As per accounting standards, ABC Co. categorizes those balances under three headings. These include assets, liabilities and equity. Assets include debit balances, while the others have credit accounts.
One of the account balances reported under the assets category is accounts receivable. This account represents balances owed to ABC Co. from its customers. The accounts receivable balance presented on the company’s balance sheet is $250,000. The general ledger for this account is as below.
In the above account receivable ledger, the debit side includes increases in the account balance. In contrast, credit transactions decrease this balance. Overall, the $250,000 remaining balance represents the difference between both sides. Therefore, the account balance shows the residual amount after deducting the credit balances from the debits.
Similarly, ABC Co. has another account balance under its liabilities category. This account comes from accounts payable, which is money owed to suppliers. Currently, it has a $150,000 credit balance. The ledger for the accounts payable account balance looks as follows.
In the above account, the left side represents transactions that decrease the accounts payable balance. However, the credit side involves purchases, which increase it. Overall, the difference between both sides represents the account balance of $200,000 in the accounts payable ledger.
The term account balance may refer to two things based on the area to which it relates. In banking, it represents the remaining money in a bank account ready for spending. However, it shows the difference between debit and credit transactions in a general ledger in accounting. Although the term account balance applies to both, it is more prevalent in the latter field.