What Does Ledger Balance Mean and How Does It Work?

What Is a Ledger Balance?

A ledger balance is computed by a bank at the end of each business day and includes all withdrawals and deposits to calculate the total amount of money in a bank account. The ledger balance is the opening balance in the bank account the next morning and remains the same all day.

The ledger balance is also often referred to as the current balance and is different than the available balance in an account. If you log into your online banking, you may see your current balance—the balance at the beginning of the day—and the available balance, which is the aggregate amount at any point during the day.

Formula and Calculation of Ledger Balance

You can use the following formula to calculate the ledger balance of your account:

Ledger Balance = Opening. Balance + Credits - Debits

In order to calculate your ledger balance, add all the credits (deposits, reversals, etc.) that go through your account during the day to the opening balance. Then subtract all the withdrawals, transfers, and other debits from that figure. This will give you the end of day or ledger balance.

How a Ledger Balance Works

The ledger balance is updated at the end of the business day after all transactions are approved and processed. Banks calculate this balance after posting all transactions, such as deposits, interest income, wire transfers that go both in or out, cleared checks, cleared credit card or debit transactions, and any correction of errors. It represents the existing balance on an account at the onset of the next business day.

Processing delays related to pending deposits can occur because the bank must first receive funds from the financial institution of the person or business who issued the check, wire transfer, or another form of payment. Once the money has been transferred, the money is made accessible to the account holder.

The bank statement only provides the ledger balance to a particular date. Deposits made and checks written on or after this date do not appear on the statement. The ledger balance may be used to determine whether the requirement to maintain a specific minimum balance is being satisfied. It is also included in bank account receipts. The ledger balance differs from the available balance of the bank account.

How to Calculate a Ledger Balance

You can calculate your ledger balance by taking the opening balance and subtract debits and add any credits/deposits.

Debits may include any transaction made throughout the day, such as bank card transactions. Credits include deposits, such as payroll, as well as payments from customers or refunds.

After adding the credits and subtracting the debits from your opening balance, you’ll have your current ledger balance. 

Ledger Balance vs. Available Balance

The ledger balance differs from the customer's available balance, which is the aggregate funds accessible for withdrawal at any one point. Because the ledger balance remains the same throughout the day, it does not include real-time transaction updates.

The available balance changes frequently throughout the day as transactions hit the bank account. Neither balance includes outstanding checks just written from the account, but the available balance updates for recent automated teller machine (ATM) withdrawals, deposits, and other transactions as the information is received by the bank.

Understanding the difference between ledger balance and available balance is a vital aspect of proper financial planning. After viewing the ledger balance, if a check is written or a transaction is made, an account holder may withdraw more money than is available.

This may lead to bank overdraft charges as well as fees from the other party's bank or business. Monitoring balances on a regular basis alerts a customer of any unauthorized transactions that occur or potential errors committed by the bank.

Importance of Ledger Balances

The ledger balance is the balance at the beginning of the day—not the ending balance. This balance is usually calculated at the end of the day, which is the same as the available balance.

When you log into your mobile or online banking, you may not see the most updated information. Some banks display both the current and available balances, so consumers can tell how much they have to use at their disposal.

Don't rely on bank statements either. As noted above, balances displayed on statements are taken from a ledger balance on the statement date. Keep in mind that if you've conducted any transaction conducted after the statement date, such as deposits, withdrawals, checks, or anything else, will affect your available balance.

In order to ensure you're working with the most updated balance at all times, it's always important to keep your records up to date. You may consider keeping your own ledger, with a running total of your balance after considering any and all transactions through your account.

Example of a Ledger Balance

Say the opening balance for Monday morning is $1,000. You have a payroll deposit of $500 and $150 charges on your bank card. Regardless of the transaction, the ledger balance remains the same throughout the day. 

That is, the deposit and the bank card charge haven’t officially cleared. However, the available balance will be updated to reflect these changes. 

The Bottom Line

The ledger balance isn’t updated until the end of the business day. The available balance is the ledger balance with pending transactions added or subtracted. These pending transactions can include checks, wire transfers, deposits, and bank card charges.