Ledger Balance | Ledger vs Current vs Available Balance
As a freelancer, or business owner, you may be extra focused on the numbers in your bank account for the first time and you may be wondering what the Ledger Balance is. Specifically, what is the difference between a Ledger Balance and other balances like the Available Balance?
Let’s find out.
What is a Ledger Balance? Also known as Current Balance
To put it simply, a Ledger Balance, or Current Balance, represents how much cash you actually have access to in a bank account. It is often defined as the “beginning balance” of a given day for a bank account and it includes the previous day’s balance plus or minus transactions that have been posted that day. Ledger balance is calculated only daily and does not change throughout the day. What does this mean?
When transactions occur, they don’t always post or clear instantaneously–that means that when you pay someone, or receive money, that amount may not be taken out, or received immediately.
What this translates to is the ledger balance showing what cash you actually have for that day, but your “theoretical” cash position could actually be higher or lower, depending on whether the amounts that have yet to clear are more in incoming payments or more in outgoing payments. Talk about confusing concepts! Let’s simplify this a bit, so you can focus on more important business things like write offs.
Here is an illustrated example of transactions and how it may affect ledger balance:
Today is 07/27/2022, here are a series of transactions that occurred around this date:
Payments issued:
On 7/25/2022, you paid someone $100 and it has POSTED (money has actually left the account)
On 07/27/2022, today, you paid a vendor $50, it HAS NOT POSTED (money has not actually left the account, even though the transaction may appear in the list)
Payments received:
On 7/25/2022, you received a payment of $300 and it has POSTED
On 7/27/2022, you received another payment of $500, it HAS NOT POSTED
Note: the ledger balance reflects the bank balance at the BEGINNING of a day
Ledger Balance Example Calculated (on 07/28/2022, the next day):
Say your ledger balance was $10,000 on 7/27/2022:
07/27/2022 ledger balance: $10,000
Minus $100 posted transaction made on 7/27/2022
Plus $300 posted transaction made on 7/25/2022
07/28/2022 ledger balance: $10,200, available balance: $10,650
Ledger balance on 07/28/2022 omits two transactions, because they have not yet posted or cleared. In this scenario, your theoretical available cash is actually $10,650, but the ledger balance will only show $10,200 due to payment clearing timing differences.
Wait, what is Available Balance?
Available balance is another number you may see in your bank account. It represents how much cash you have if all transactions were already posted. To make matters more confusing, banks often allow you to transact based on the available balance, and not the ledger balance even though the ledger balance is cash that’s actually in the bank account. Sheesh!
Available balance is recalculated more often and can be instant for certain transactions like withdrawals. In the above example, we can see that the Available Balance is higher at $10,650–this is because it assumes the other two transactions (payment out of $50, and received payment of $500) have been posted. In reality, those two transactions are still pending and you do not “actually have” that cash just yet.
Ledger Balance vs Available Balance: What’s the difference and why is it important?
The difference between ledger balance and available balance can be subtle, but the distinction is extremely important. Here is a quick summary:
| Balance Type | Ledger Balance | Available Balance |
|---|---|---|
| What: | Cash balance that represents how much cash you actually have access to. Only calculates once per day and does not change throughout the day. | Cash balance that represents how much cash you would have, if all transactions were posted. Calculates each time a transaction occurs. |
| How: | The ledger balance is calculated each day and represents the beginning cash balance of that day. It adds and subtracts transactions that HAVE POSTED from the previous day. | The available balance is calculated each time a transaction occurs. It represents how much cash is available if all transactions were instant and posted immediately. It calculates simply by adding or subtracting transactions as they come in. |
| Why It's Important: | Ledger balance is a more accurate picture of what your cash position actually is. In the case of a business, you need to know how much cash you actually have on hand to spend, in case you pay a vendor more than your balance and overdraft, for example. | Available balance can be a good indicator of how much cash comes in and out, regardless of timing differences. It can also be used to get an idea of whether a business has financing needs if cash in tends to take longer than cash out, for example. |
ledger balance vs. available balance: a quick guide
The ledger balance is especially important, because it represents how much cash a business actually has available to spend. Since not all transactions post immediately, you could potentially have a higher ledger balance than an available balance and make a payment based on the ledger balance that makes your cash balance negative. This would result in complications like overdraft fees, delays and unhappy vendors/customers.
FAQs:
Can I spend my ledger balance?
No–you shouldn’t rely on the ledger balance to keep track of spend. Ledger balance can be higher or lower than the available balance, due to transactions not always posting or clearing instantly.
What is ledger balance and available balance?
The ledger balance is the actual amount of cash that is in a bank account, versus the available balance which is the cash that’s available if all transactions have cleared.
Ledger balance is the “beginning” cash balance of a bank account, and does not change throughout the day. It represents the amount of cash you have available plus or minus the transactions that have cleared in the previous day. Available balance is the cash balance of a bank account, if all transactions have cleared and it’s calculated each time a transaction occurs.
How long does it take for a ledger balance to clear?
It may take around 24 hours for the ledger balance to clear without any holidays–ledger balances are usually processed at the end of business day at financial institutions.
