Understanding Ledger Balance: What It Is and How It Works

By Indeed Editorial Team

Published May 14, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Almost every company manages its business accounts to keep a record of income and expenditure. Tracking the ledger balance (LB) is part of this process. If you work in accountancy, it's important to understand LBs so you can monitor the revenue, debt, assets, and expenditure of the companies you work for. In this article, we discover what an LB is and why it's important, discuss the difference between a ledger and available balance, explore how it's helpful for accountants, and offer tips for improving its accuracy.

What is a ledger balance?

A ledger balance (LB), or current balance, is a record of credit and debit transactions that indicate the financial status of an individual or organization. It represents the total funds available in an account for customer use and transactions. You can calculate the LB by adding the credit and debit entries in all accounts that are directly or indirectly related to a specific business or company. Accountants are typically involved in the process of updating the balance in real time, as new transactions take place daily, weekly, and monthly.

Example of a ledger balance

Below is an example of a ledger balance:

At the start of the day, an account has funds of $500. A further $1000 enters the account later that same day. Despite these additional funds, the LB may still stand at $500 by the day's end. This is because the account status only updates on the following day. By contrast, if a customer has $700 in their account, from which they have withdrawn funds of $300 in the form of a cheque, these latter funds may be on hold, and the customer may see the true balance of $400 by the end of the day.

What is the difference between a ledger balance and an available balance?

An LB is the total amount of funds available in an account for customer use. This includes any unpaid deposits, withdrawals, and any fees or interest. The available balance is the amount of money available to spend right now. It includes all the funds in a bank account except those that the bank or payment provider has placed on hold. Accountants don't update the ledger balance in real time, as they do with the available balance.

The ledger update only takes place at the start of the day, whereas the available balance updates in real time as new transactions can occur several times a day. As an accountant, it's possible for you to estimate the available balance. It does not require direct calculation since it only includes the funds you can access immediately. The LB may only update when a business processes transactions, while the available balance updates in real time.

How is the general ledger useful to an accountant?

As an accountant, it's important to understand the current financial status of the business or company you're working for. LB is an integral part of any business and, along with other accounting practices, helps you to understand the exact amount available for use at all times. You can track the income and expenditure of a business by checking the credit and debit entries for all accounts relating to a particular company or industry. This helps to forecast the company's income and expenditure over a specific period.

Many companies have separate accounts for different transactions. If this is the case, you can maintain the LB by adding credit and debit entries either directly or indirectly as they relate to a specific business or company. Keeping these types of entries in the general ledger not only reduces error but also keeps track of all the different accounts. An individual or business can gain valuable insight into the available funds from a detailed, up-to-date general ledger.

Related: Accountant vs. Auditor: Differences and Similarities

The importance of a ledger balance

An LB is important in your work as an accountant, as it enables you to keep track of a company's financial status. Some of the most important functions of the general ledger are:

It's an excellent record-keeping tool

The LB is a highly useful record-keeping tool that you can leverage. It consists of a centralized register of all transactions that helps with time management and organization within a company. As an accountant, you can use this to track and report information relating to a business's financial status and report this back to the business owners.

It helps with precise forecasting

The LB helps to forecast a business's accounts. It does so by calculating expected incomings and outgoings. A detailed analysis of the LB along with the cash flow forecast, can help a business to determine if it's making profits or incurring losses.

Related: What is Forecasting? (With Definitions and Different Methods)

It allows accurate analysis

An LB helps analyze operations, revenue, and expenses quickly, easily, and accurately. This efficient method of analysis provides an opportunity for you to conduct a detailed financial assessment of accounts to uncover the reasons behind any discrepancies or unexpected issues. Analyzing this type of data also helps inform decisions relating to the growth and progress of a business.

Related: How to Write an Analysis (With Importance and Tips)

It enables the production of concise financial statements

As an accountant, you can utilize the LB to prepare a short, accurate description of the financial status of a business or company. You can consolidate this data into simple terms using double-entry bookkeeping principles to create concise statements that are easy to understand. Using data from the LB also helps to produce a business balance sheet, which is a record that summarizes all assets and liabilities.

It's a solution to money management challenges

If a business faces challenges with money management, it's possible to use accounting software that can automate financial transactions and record them accurately in the LB. This is a recommended way for businesses to manage their money systematically as it keeps track of all their income and expenditure. As an accountant, you can rely on such software to perform financial tasks and maintain accurate records of all transactions.

How can you ensure that a ledger balance remains accurate?

You can ensure an LB remains accurate by updating it as soon as a new transaction takes place. This helps you better manage the financial aspect of the organization you work for. An up-to-date ledger provides insight into the financial health of an individual or company at any one time.

Tips for improving a ledger balance

To improve an LB, you can follow some simple tips. If you are looking for ways to maintain accurate records, implement the following options to help you get started:

Maintain accuracy

It's very important that you maintain an accurate LB. Any discrepancy in the provided data may reflect poorly on a company's performance. It's therefore beneficial to remain alert and maintain accuracy at all times to ensure that you are providing the correct information for an improved LB. Another method of keeping your records up to date is to carry out frequent audits.

Keep it simple

To keep the data in your LB organized, use separate accounts for different transactions. You can set up sub-accounts by creating rows or columns for recording specific types of transaction entries. Doing so helps you maintain separate LBs for each department, client, project, etc., which is very helpful in accurately assessing the financial management performance of different areas of the business.

Update regularly

To maintain an accurate LB for the business you work for, regularly input all the transactions into the accounting software. This helps you to track financial results and record them accurately in your general ledger. You can also add journals or books, such as payroll or purchase books, that include information relating to other sources that affect the business.

Use automated technology

Employing an automated software solution is the best way to improve an LB. Such software automates all financial tasks and records them in the ledgers at regular intervals. When you use an automated ledger, the risk of error reduces as the software tracks all the various transactions. This method can help you maintain accurate records of a business's financial health by taking human error out of the equation.

Make it easy to understand and use

A ledger that is easy to understand and straightforward to use enables anyone to look into accounts and conduct necessary activities. Such a ledger can be an effective tool for small businesses that are looking to take control of their financial health. Using this tool can make it easier for them to make important decisions and solve problems.

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