It might seem simple – a closing balance is the amount remaining in an account at the end of a certain period – but this closing balance definition is more accurate to closing balances in banking, whereas closing balances in accounting are a little different, and require a little more legwork to calculate.
What is closing balance in banking?
In banking, the closing balance simply refers to the bank balance at the end of a day, month, or year. This includes both credit and debit amounts. A bank closing balance may differ from an accounting closing balance as there may be outstanding transactions that haven’t yet been cleared by the bank that wouldn’t be included in a bank closing statement, but would be included in an accounting closing statement.
When you look at your bank statement, your closing balance is always listed at the top of the statement, and indicates how much money you have available in your account.
What is closing balance in accounting?
In accounting, the closing balance refers to the amount of funds available to a business at the end of a designated accounting period, and it is determined by calculating the difference between credits and debits as they appear in the general ledger.
An accounting period can be a day, a week, a month, a quarter, a year; it really just comes down to how your organisation tracks its finances.
The amount remaining in your account at the end of the accounting period may be a positive or negative amount, and the closing balance will always be the amount carried into the next accounting period, where it becomes the opening balance for that period. You might also see closing balance in accounting referred to with the abbreviations ‘c/d’ for ‘carried down’ or ‘c/f’ for ‘carried forward’.
In business, the closing balance is regularly presented by the organisation’s accountants to upper management at the end of each accounting period.
How to calculate closing balance
If you’re wondering how to work out closing balance for your personal banking, don’t worry, it’s as easy as checking your monthly bank statement, where your closing balance will be stated clearly. On the other hand, you’d need to use a formula for closing balance in accounting to work it out.
This closing balance formula is, however, pretty straightforward. You simply need to take your opening balance at the start of the accounting period, add any earnings, and subtract what you spent in the period.
Simply add up all your earnings (debit), whether from sales, loans, debtors, or otherwise, and add up all your payments (credit), including salaries, creditors, expenses, etc., and work out the difference between debit and credit. If you started an accounting period with $10,000, you earned $17,000 throughout the period, and you spent $13,000, the closing balance formula would be 10,000 + 17,000 – 13,000 = $14,000.
Another way of putting it is closing balance = net cash flow + opening balance, with net cash flow representing the difference between all cash inflow and outflow within the accounting period.
If the debit side ends up bigger, the closing balance is a debit balance, and if the credit side is bigger, it’s a credit balance.
Why is closing balance important?
The closing balance for a business after any given accounting period is extremely important to monitor as it indicates whether a business may be spending too much or not earning enough. If you end the month with a negative closing balance – you know something needs to change. Regularly checking closing balances simply helps businesses stay on track.
It’s important to carefully keep track of every single transaction your business makes, whether through a cash book or another accounting journal, so that if your closing balance isn’t looking good you can quickly and easily evaluate your spending and earning in detail and identify potential weaknesses. Closing balances will also be vital when it comes to reconciliation.
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