Last editedJan 20222 min read
In simple terms, an account balance is the amount of money left in a particular account at a specific moment in time. If you run a business then understanding what your account balance is will play a key role in ensuring the maintenance of your cash flow and calculating what your net profit is at any given time. The mention of net profit is a timely reminder of the fact that the account balance – in order to be useful – needs to be the net amount in the particular account. This means that it is the amount which will actually be left in the account when all debits and credits – such as incoming or outgoing bank transfers and online payments – have been taken into account.
Understanding an account balance
The account balance for your business shows the total assets minus the total liabilities and, as such, learning to understand and evaluate your account balance is key to calculating what the net worth of your business actually is. The degree of volatility within any given account will vary depending upon the type of account in question. A checking account, for example, will have an account balance which reflects the value of that account or the current sum of the funds resting in the account.
Types of account balance
As well as the account balance for a business as a whole, there are many other types of account which might have an account balance, and understanding how all of these different accounts will impact on the operation of your business will aid greatly with forward planning and financial management. Bills such as utility bills, for example, will feature an account balance which, in this case, generally applies to the amount of money which is owed on the account.
Main account balance
If you’re dealing with the main bank account used by a business, then the account balance in a checking account will refer to the amount of money which is available to draw on and use when running your business. Calculating the account balance in order to plan spending and investment will involve adding together the deposits and credits and then subtracting any charges or outstanding debits. In some cases, the account balance – because it offers a snapshot of the situation at a particular time – doesn’t give a wholly accurate picture of the financial health of a company. The reason for this is that the available funds at any given time might be hugely impacted by pending transactions or payments which haven’t been processed to date.
Calculating an account balance
If you make use of a company credit card then you’ll be able to work out the account balance of the card in the following manner:
Purchases have been made using the card which valued £25, £150 and £275
At the same time, a return has resulted in the card being credited with a refund of £35
The total amount of spending on the card equals £450
When the refund of £35 is subtracted from the spending of £450 it leaves a current account balance of £415.
In a standard account the same principles apply. If you have £25,000 as a starting balance, and then have payments pending – i.e. debit card payments which take a couple of days to clear – of £2,500, then the balance will be £27,500. If you have payments due to go out of the account – whether they are debit card payments or bills falling due – valuing £200, £300 and £650, then the actual account balance will be £27,500 minus £1,150, which equals £26,350.
The amount of time which it takes for various types of payment to land in or leave an account varies from bank to bank, so it’s vital that you always keep an accurate and
up-to-date record of credits and debits in order to be certain exactly what your account balance is.
We can help
If you’re interested in finding out more about your account balance, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments