'Account Balance' Definition:
Account balance refers to the difference between the total amount debited and the total amount credited to an account. Balances from ledger accounts make up the amounts reported in the financial statements.
- Definition of account balance
- How to get the account balance
- Use of account balances
How to Get the Account Balance
Every account has two sides: debit (left side) and credit (right side). Amounts are entered into each side as business transactions are recorded and posted.
Most accounting systems are automated. With a few clicks, a user can access different accounts and their account balances. Getting the account balance – whether done manually or automated through a computer, involves the same process. The account balance is equal to the difference between the total amount debited and the total amount credited.
Asset accounts normally have debit balances. Liabilities and capital accounts normally have credit balances. Revenues have credit balances; and expenses have debit balances.
ABC Company's cash account showed the following amounts:
Total debits made to the cash account amounted to $290,000 while total credits amounted to $175,000. In this case, by taking the difference, Cash has a debit balance of $115,000.
The accounts payable of the company had the following amounts entered to it as a result of the following transactions: 1) initially had $50,000 accounts payable at the beginning of the year, 2) paid $20,000 of accounts payable to its suppliers, 3) purchased additional merchandise on account, $60,000, 4) paid another $20,000 of the remaining old accounts.
Take note that liability accounts normally have credit balances. To increase a liability account, it is credited; to decrease it, it is debited. Total debits amounted to $40,000 while total credits is equal to $110,000. Hence, accounts payable has $70,000 credit balance.
Use of Account Balances
The illustrations above were simplified. In actual practice, an account may contain a very long list of amounts due to the volume of transactions they have. Nonetheless, computerized accounting systems are capable of handling them.
The final account balances are reported in the financial statements. The financial statements give information about a company's financial performance and condition.
Also, in a real-time accounting system, account balances are readily available to managers and may provide information to be used in decision-making even without preparing a complete set of financial statements. A manager may need to know the balance of cash as of date to know if they still have enough left for their operations. A manager may also want to know the running balance of receivables to see if the company is collecting its receivables effectively.