Give tips to succeed in business or brilliant business ideas.

Ledger Balance Explained

Ledger Balance Explained

A ledger balance is nothing but the difference between the debits and credits of a ledger account for a given accounting period. This Buzzle article explains the concept with the help of an example.
Neha B Deshpande
"When I looked at my life's ledger I realized I was a very rich woman. What I was experiencing was merely a temporary cash-flow problem. Finally, I came to an inner awareness that my personal net worth couldn't possibly be determined by the size of my checking account balance. Neither can yours."

― Sarah Ban Breathnach, Simple Abundance: A Daybook of Comfort and Joy
This quote, though philosophical, does help us understand the concept of a ledger. Simply put, it is a collection of your financial accounts or the record of your credits and debits. Let me explain. Businesses that have a double entry book-keeping system, maintain ledger accounts. All your journal entries are posted to respective ledger accounts. Thus, a ledger displays the debits and credits to a particular account for a given period of time. The difference between the debits and credits is the ledger account balance. However, note that the ledger account balance is the balance at a given point of time. It is subject to differ with transactions made on the account. It is obtained by subtracting the debits from the credits for a given accounting period.
Let us understand the concept better, with the help of a simple example.

Sam has $100 in his pocket. He spends $20 and receives $60 from his parents.

Suppose, we consider Sam's cash book (ledger account for cash in hand):

The opening balance in his ledger account is $100.
He spends $20, which he credits to the cash account. Thus, the balance left is $80.
$60 received by him is debited to his account.
Now, he has $140 in his account.
Importance of Maintaining Ledger Accounts
► A personal ledger account shows the account receivables or payables at any point of time.
► Maintaining a cash or bank book, will immediately show you the liquidity you have.
► You can compare your bank book and the customer balance as per your bank. This will be helpful for preparing the bank reconciliation statement.
► Without a ledger, you cannot prepare a Trial Balance and Balance Sheet. Thus, they help you in preparing the final accounts.
What is the Ledger Balance in a Bank Account?
A ledger balance in a bank account simply means the current balance in your bank account, as per the bank's records. However, it might differ from the available balance since the checks that are deposited, but not cleared, may not be credited to your account. Bank reconciliation statements are prepared so as to reconcile the difference in the ledger balance as per the bank and as per your financial records. The ledger balance as per the bank account records may differ from that in your records for reasons like check not presented for payment by the party, bank charges not recorded, etc. However, any errors or omissions also get detected when you compare the ledger balances.

In the books of Mr.Y

Date Particulars Ref no. Debit (USD) Credit (USD) Balance (USD)
1st Jan 2015 Sales 3000 3000 (Dr.)
10th Jan 2015 Cash 1000 2000 (Dr.)
20th Jan 2015 Sales 2500 4500 (Dr.)

Note : Dr. = Debit

The above ledger of Mr. X in the books of Mr.Y shows the transactions between the two parties. This ledger is prepared on the assumption that Mr. X is a new party and there is no closing balance of the previous year that has to be carried forward to the next year. On 1st Jan 2015, Mr. Y made sales to Mr. X for USD 3000. Thus, Mr. X's account has a ledger balance of USD 3000 (Dr.). It indicates that he is liable to pay USD 3000 to Mr. Y. After receipt of USD 1000 from the debtor, his debit balance has been reduced to USD 2000 (Dr.) The sales of USD 2500 have changed Mr. X's debit balance to USD 4500 (in the books of Y). On the other hand, in the books of X, Mr. Y's account will show a credit balance of USD 4500. If there is any difference, it will be reconciled.
Thus, you can see that the accounting term ledger balance simply refers to the balance of a ledger account, which is nothing but the difference between the credits and debits to this account.