Understanding Account Balance
The concept of account balance refers to the total amount of money that can be withdrawn from a bank or crypto account.
It plays a crucial role in the banking and finance, facilitating transactions for individuals, corporations, and enterprises.
These accounts offer an alternative to traditional cash transactions and provide various options for storing, transferring, and receiving assets and payments.
Accounting for Cash Flow from Bank Accounts
In banking, the account balance encompasses both deposits and withdrawals made from a bank account.
However, any funds paid out from these accounts result in a negative cash flow, causing a decrease in the overall balance (potentially leading to an overdraft).
These payments may include bank charges or fees, typically cash withdrawals or payments made to third parties.
Account Balance in Loan Accounts
Sometimes, a bank may extend financing to an entity through a loan accompanied by a bank account. However, the account balance in such scenarios differs.
It refers to the amount the entity owes to the bank rather than the available cash.
It’s important to note that this term applies not to savings or checking accounts but to loan accounts.
Overall, in banking, the account balance represents the total amount of money an entity holds within its bank account.
It encompasses both checking and savings accounts, and is calculated by deducting all payments made from the account’s receipts to determine the remaining balance.
Account Balance in Accounting
The term “account balance” is relevant in banking, crypto, and accounting.
In accounting, it refers to the difference between the debits and credits recorded in a ledger account.
These accounts can pertain to assets, liabilities, or company stock, and the remaining balance holds distinct significance in each case.
Typically, account balances for assets are shown as debit balances.
Assets represent items held or managed by an entity that can provide future economic benefits.
Debit transactions predominantly constitute asset balances, resulting in a positive balance if the debits have had a favorable impact.
Balances and Principles
Conversely, liability and equity accounts often have credit balances.
In the case of liabilities, these balances indicate the obligations resulting from previous transactions that led to the loss of economic benefits.
Regarding an entity’s equity, the balance represents the amount that can be distributed to owners or shareholders based on business operations.
While these principles generally apply to assets, liabilities, and equity balances, there may be exceptions, such as counter accounts.
In specific cases, the opposite treatment is applied to individual items.
For instance, counter-asset accounts accumulate credit balances over time instead of debit balances.
Distinguishing Available Balance and Current Balance
The available balance refers to the amount of funds that can be accessed for spending. It determines whether a user has sufficient funds to cover a transaction.
Calculating the account’s available balance includes deposits, withdrawals, and pending transactions such as pre-authorized transfers, point-of-sale transactions, and merchant payments.
At times, the available balance may be lower than the current balance.
In such cases, the accessible funds represent the amount available (or a lesser amount if there are outstanding checks), while the financial institution holds the remaining funds.
The current balance considers all the funds in the account, including both accessible and held amounts.