What is an Account Balance?
An account balance is the amount of money present in a financial repository during the current accounting period. It is the net difference between the credits and debits posted in any given accounting cycle, added to the balance carried forward from the previous month.
An account balance may reflect an amount owed or the net debt. The former is commonly represented in financial accounts that include recurring bills, such as utility bills or gym membership bills. On the other hand, the latter is expressed in financial accounts with negative cash balances, such as bank overdrafts.
- An account balance is a statement that shows the total money available at the start of the accounting period.
- Credit cards and checking accounts are typical examples of accounts with account balances, and the pattern of their activities determines the credit score.
- While account balance is the measure of the currently available amount on a credit account, available credit is the unused portion of the loan that is available on a credit account.
Understanding Account Balances
Account balance typically represents the difference between total assets and total liabilities. It is also known as the total wealth or net worth since it excludes any form of debt or obligation from the total amount.
For some accounts, such as brokerage and checking accounts, the current balance can reflect the present value of the sum of funds for specific accounts. The account balance tends to fluctuate over time, especially when the account holder is continuously making investments.
The changing balance can also be explained by the rise and fall of security prices in the market. The available balance is also used by financial analysts to monitor and evaluate various transactions.
For example, the current balance is determined by recording purchases and sales transactions in the appropriate accounts to establish whether the account balance is increasing or decreasing.
Since recurring bills show the account holder the current amount owed at any time, a financial statement is provided to indicate the currently available balance in accounts such as mortgage and utility bills.
The concept of account balance extends to the total amount of money owed to a third-party lender such as a mortgage banker, credit issuer, or utility company. However, in other sectors such as banking, the account balance shows the available amount of money in the savings or checking account.
Therefore, account balance is the net amount available after balancing the ledger accounts. In cases of unprocessed checks and pending transactions, an account balance may sometimes fail to represent the accurate available funds at any time.
Types of Account Balances
The main types of account balances are credit cards and checking accounts.
1. Credit cards
Credit cards can hold outstanding or negative account balances, which change from month to month, depending on the card’s transactions. Generally, a credit card balance can impact an individual’s credit score.
An account balance on the credit card can be attributed to several factors, including purchases, payments, and balance transfers. To demonstrate this, consider various purchases of $200, $90, and $150, and a returned item that costs $50.
The total purchases, which are $440, and the amount of the item returned, constitute the account balance. From the amount, the net of the credits and debits is $440 minus $50, which gives an account balance of $390.
2. Checking accounts
A checking account is another type of account balance that allows deposits and withdrawals. A unique feature of this type of account is that it allows multiple withdrawals and unlimited deposits.
Assume that the starting balance in a checking account is $750. The account holder received a check worth $3,000 or a scheduled payment of $1,500. The account balance might immediately read $3,750, depending on the locality of the bank. However, the genuine account balance is $2,250.
Recording every credit and debit entry and reconciling thereafter is important, as it tracks the exact account balances.
Available Credit vs. Account Balance
The available credit is the unused fraction of credit that is currently available on a credit account. Available credit, as with account balance, significantly influences the credit score.
Keeping the credit balance low implies that credit utilization is also low. If more than the available credit is used, it will be declined unless the owner keeps a special arrangement for over-the-limit transactions. In addition, overusing the available credit presents the risk of triggering the over-the-limit charge fee.
Comparatively, account balances on credit cards show the total amount owed to the credit account at the beginning of a statement cycle. Also, any debt rolled over from previous months represents an account balance on credit. The rollover amount may include accumulated interest charges.
In some bank accounts, deposits may not reflect immediately after a transaction and can take up to several business days before reflecting the actual account balance. In such circumstances, banks will typically indicate the pending deposit, alongside the currently available balance.
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: