What happens to your money between the time it takes to write a check and the time when it’s cleared from your bank account? This period is called the float, and it’s important to understand a float account meaning to keep track of all your transactions. Here’s what you need to know about the float accounting process.
What does float mean in accounting?
When you’re keeping track of business accounts, there are sometimes gaps or delays between making a deposit or withdrawal and the funds clearing the account. These gaps are due to a delay in payment processing along with the usual bank clearance process. This float account meaning is usually applied to paper checks, which take far longer to process than electronic bank transfers. During this in-between time, the money floats within two accounts and exists in two places – the deposit and withdrawal accounts.
For example, imagine that Sally’s Soaps writes a check for $3,000 and gives it to an essential oil supplier on Monday. The money won’t leave Sally’s checking account until Thursday. This means that between Monday and Thursday, the $3,000 is in float, a sort of limbo between both accounts. If Sally’s Soaps wants to pay another supplier during this float, Sally will need to think about the timing of the withdrawal to make sure all the funds clear.
Causes of accounting float
To better understand the float account meaning, we can turn to the Federal Reserve definition. The Fed recognizes two float types, the first being a holdover float. This happens when there are processing delays due to holidays or weekend backlogs. The second type is transportation float, which is caused by physical shipping delays due to bad weather or other issues.
Although there can be random fluctuations in float timings, the Federal Reserve uses seasonal trends to forecast check volumes and corresponding float levels. This has an influence on monetary policy, so that banking institutions can plan accordingly. A one day float bank account might only take 24 hours for clearance, for example.
How to calculate float
When you’re trying to balance the books, you’ll need to factor in the float. A handy formula to use when calculating float is:
Float = Available Balance – Book Balance
This helps you keep track of how much money your business has on hand to spend, despite what the bank account is saying. It’s important to keep track of all outstanding deposits and withdrawals keeping clearing periods in mind. Float accounting software can help automate this process for better real-time tracking of payments.
Calculations are simple for small businesses that only send out a few checks per day, but what about larger businesses with hundreds or thousands of outstanding payments? In these cases, you can calculate an average using your float accounting software. Calculate average daily float by dividing the total value of checks going through the collection process by the number of days for clearance. Compare this average float to your daily cash flow to keep better track of your accounts.
Definition of a cash float in accounting
In addition to the float accounting definition above, you may also come across a “cash float” in your business. The definition of a cash float in accounting is slightly different because it refers more to petty cash used for day-to-day expenses. This cash is kept on the premises or in a designated petty cash account for employees to use.
From a one day float bank account to automated payment software, there are numerous ways to track and reduce the time your money is spent in transition. Electronic payments and transfers, direct deposit, and digital check scanning are also reducing float in real-time.
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