A bank balance is the amount of money in a bank account according to the bank's own records at a given moment. For a business, it is the figure shown on the bank statement or in online banking, as distinct from the balance recorded in the company's own general ledger. In a bank reconciliation the statement figure is called the balance per bank.
The bank balance is rarely identical to a company's book balance on any given day, because the bank and the depositor record some transactions at different times. Nor is it always the amount that can be spent immediately: banks distinguish between the ledger, or current, balance and the available balance, which excludes deposits not yet released under the bank's funds availability policy and includes the effect of holds.
Bank balance in plain terms
Think of two people keeping score of the same game. You keep your own notes of every check you write and every deposit you make; the bank keeps its own notes of every item that has actually reached it. Your notes are usually a few days ahead, because you write down a check the moment you post it, while the bank only knows about it when the payee deposits it.
The bank balance is the bank's score. It is accurate from the bank's point of view, but it has not yet caught up with everything you have done, and it may include fees or interest you have not yet heard about.
Ledger balance and available balance
Banks typically report more than one balance for a checking account:
- Ledger or current balance. All deposits and withdrawals posted to the account at the end of the previous business day.
- Available balance. The amount the customer can withdraw or use right now, after holds on recently deposited checks, pending card authorizations and other restrictions.
- Collected balance. In commercial banking, the ledger balance less deposits that the bank has not yet collected from other banks, used for calculating account analysis fees and earnings credits.
In the United States, the funds availability schedule that banks must follow under federal rules sets maximum hold periods for deposited checks. A business planning payments should watch the available balance, since paying against uncollected funds can trigger returned items or an overdraft.
Why the bank balance differs from the books
The main differences between the bank balance and the company's Cash account fall into a few groups:
- Items recorded by the company but not yet by the bank, chiefly deposits in transit and outstanding checks.
- Items recorded by the bank but not yet by the company, such as service charges, interest earned, electronic receipts and returned customer checks.
- Errors on either side, including bank errors and bookkeeping mistakes.
Reconciling the bank balance
Each month, the company prepares a bank reconciliation. Suppose the statement shows a bank balance of $42,600 at March 31. A deposit of $5,400 made late on March 31 has not yet been credited, and checks totalling $7,850 have not cleared. The adjusted bank balance is $42,600 + $5,400 − $7,850 = $40,150. The book side, after recording a $40 service charge and $15 of interest, must also come to $40,150. That agreed figure is the true cash balance and is the amount reported on the balance sheet.
Reporting and control
On the balance sheet, a company reports its reconciled book balance, not the raw bank balance, usually within cash and cash equivalents. Balances that cannot be freely used, such as compensating balances required by a lender or funds held in escrow, are presented separately as restricted cash. A bank account with a negative bank balance is generally shown as a liability unless the company has a right of offset with other accounts at the same bank.
Comparing the bank balance with the books is also a key fraud control. Because the bank's record is independent of the company's staff, discrepancies can reveal unrecorded withdrawals, check kiting or embezzlement. Auditors routinely confirm year-end bank balances directly with the bank for the same reason. Federal deposit insurance through the FDIC applies to the bank balance held at an insured bank, up to the applicable coverage limit, which is a further reason treasurers monitor balances across banks.