What Is a Ledger Balance, and Why Does It Matter for Your Business?

Have you ever logged into your online banking portal to find your balance isn’t what you expected? You’re looking at your ledger balance, which is different from your actual available amount.

But what is a ledger balance, exactly? It’s the opening balance in your banking account at the beginning of each business day. It reflects all cleared and settled transactions, meaning it leaves out any pending ones. While the ledger amount isn’t accurate to the hour, it avoids fraudulent transactions and keeps you from overdrafting.

Here’s how to calculate your ledger balance and why it’s important. 

What Does “Ledger Balance” Mean?

Your ledger balance, which also means current balance, is the amount of money in your account at the start of each business day. It reflects all completed transactions from the previous day. This includes deposits, withdrawals, and interest. 

Think of your ledger balance as a snapshot of your account. Your available balance is how much you have to spend at a given time, with all transactions accounted for. But the snapshot doesn’t change throughout the day, no matter what transactions you make. That’s because your bank has to process transactions before they officially appear in your account. 

Let’s say your ledger balance is $25,000 when you wake up on Monday morning. Even if you spend $500 on office supplies and deposit a $2,500 check from a client, your ledger won’t increase to $27,000 until the next business day. These transactions affect your available amount. You have $27,000 available to spend. But these funds aren’t reflected in your ledger balance right away.

Other pending transactions, like checks the recipient hasn’t cashed or ACH transfers that haven’t gone through yet, aren’t part of your ledger either.

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Ledger Balance Versus Available Balance: What’s the Difference?

So what’s the difference between current balance and available balance? Your available balance includes pending transactions that haven’t cleared yet. Your current balance, or ledger, leaves those out.

Let’s say you own a home services contracting business, and you have a ledger amount of $10,000 at the start of the day. You then make a $500 purchase with your debit card and deposit a $1,000 check from a client. Your available balance then reflects these transactions, showing $10,500 ($1,500 – $500 + $1,000). But your ledger balance stays at $10,000 until the next business day, when the transactions have cleared.

Since the two types of amounts are so similar, some people wonder how to convert a ledger balance into an available balance. This isn’t possible. That conversion happens automatically at the end of each business day. Only your bank can do it.

Another common question is how to withdraw a ledger balance. Once again, you can’t. Your ledger amount doesn’t include pending transactions so that money might not all be available. You can only withdraw funds from your available balance.

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Which Balance Is More Reliable?

The account statement is most accurate to the money coming in and out of your account. But the ledger balance is actually more reliable. 

While your account balance is more up to date, it could list incorrect transactions or mistakes your bank hasn’t caught yet. This could lead to inaccuracies. On the other hand, everything in your ledger balance has been approved. It doesn’t include recent transactions, but it is more reliable and better represents the previous day’s events.

How Do Ledger Balances Work?

Your bank calculates a ledger balance by applying all the transactions that clear by the end of a business day. These transactions may include:

• Deposits you’ve made
• Checks you’ve written that have been cashed
• Debit card purchases
• ATM withdrawals
• Automatic bill payments
• Transfers between accounts
• Interest you’ve earned

Once the bank confirms these transactions, it updates your ledger balance. This new amount becomes your starting point for the next business day.

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Why Are Ledger Balances Important?

They might seem pointless, but ledger balances have been a main concept in banking and accounting for centuries. They make sure inaccurate numbers or fraudulent activities don’t end up on your statement. And they exclude pending transactions until those transactions are confirmed.

When you understand how your bank calculates a ledger balance, you can avoid mistakes like overdrafts and bounced checks. And as a business owner, you can use this amount to make informed decisions about budgets and cash flow management. You avoid including fraudulent transactions in your planning process.

Check or calculate your ledger balance often to catch discrepancies and errors early. It’s a simple but powerful habit for staying on top of your business finances. You’ll make better decisions and avoid costly mistakes.

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Calculating Your Ledger Balance Step-By-Step

If your bank hasn’t calculated your new ledger amount yet, here’s how to do it yourself:

1. Note Your Opening Balance

Start by finding your opening statement for the day. This is your ledger balance from the previous business day. You should find it on your latest bank statement or your online banking portal. If you can’t see it, contact your bank for help.

2. Add Credits

Next, add up any credits to your account. These could be customer payments, refunds, and interest earned. Make sure to include only transactions that have fully cleared and are no longer pending.

3. Subtract Debits

Subtract any debits from your account, like business expenses and bills. Again, only include transactions that have cleared.

4. Double-Check Your Math

Review your numbers to make sure you haven’t missed transactions or made any errors. Your result should match your bank’s official ledger balance for the day.

Here’s an example to illustrate the process. Let’s say you own a small landscaping business. Your opening ledger amount for the day is $10,000. You receive a payment of $3,000 from a client and another $2,000 for a monthly retainer. You also pay your staff, which totals $4,000, and you spend $500 on supplies.

This is how you’d calculate your ledger balance for the next day:

1. Start with your opening balance: $10,000
2. Add the two client payments: $10,000 + $3,000 + $2,000 = $15,000
3. Subtract the employee salaries and supply expenses: $15,000 – $4,000 – $500 = $10,500
4. Double-check your math to arrive at your final amount of $10,500

5 Factors That Affect Ledger Balances

Several factors might impact the amount’s accuracy and timeliness. Here are five that influence your ledger balance, beyond pending transactions:

1. Deposit Holds. When you deposit a check, your bank may place a hold on the funds. This is especially common if it’s a large amount or comes from an odd source. When this happens, the deposit won’t appear in your ledger balance until the hold is lifted. This takes a few business days.
2. Weekends and Holidays. Banks typically don’t process transactions on weekends or holidays. Any deposits or payments you make during those times won’t be on your ledger balance until the next business day.
3. Incorrect Transactions. If a transaction gets posted wrong, like a deposit getting recorded as a withdrawal, it throws off your ledger balance. The amount goes back to normal when the error gets fixed.
4. Processing Delays. Sometimes, there may be delays in processing transactions due to technical issues or human error. These can cause temporary discrepancies between your ledger and account balance.
5. Unauthorized Transactions. If someone gains access to your account and makes unauthorized transactions, the bank may pause your ledger balance. Once you report the issue and the transactions are reversed, the amount should be correct.

To minimize the impact of these factors on your ledger balance, be sure to:

• Keep accurate records of all transactions, including pending ones.
• Regularly review your account activity and reconcile your records with your bank statements.
• Be aware of your bank’s policies on deposit holds and processing times.
• Report any errors or unauthorized transactions promptly.

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