Definition
In accounting, a balance represents the difference between the total amounts of debit and credit entries in an account. This balance is computed to ensure that financial records are accurate and to verify that the debits equal the credits after all postings are done.
If the account shows a higher debit total than credits, the balance is a debit balance. Conversely, if credits exceed debits, it is a credit balance. This balance is typically brought down to the opposite side of the account to prepare it for future transactions.
Examples
Example 1: Bank Account Balance
Let’s say an individual’s bank account has debits totaling $2,000 and credits totaling $1,500 for a period. The account balance will be calculated as:
- Debit side: $2,000
- Credit side: $1,500
- Balance: $2,000 - $1,500 = $500 (debit balance)
Example 2: Company’s Accounts Payable
A company has recorded several transactions under accounts payable with total debits amounting to $5,000 and credits amounting to $7,000.
- Debit side: $5,000
- Credit side: $7,000
- Balance: $7,000 - $5,000 = $2,000 (credit balance)
Frequently Asked Questions (FAQs)
Q1: Why is calculating the balance important in accounting?
A1: Calculating the balance ensures that debits and credits are accurately recorded and that the financial statements reflect an entity’s true financial position.
Q2: How often should balances be reconciled?
A2: Balances should be reconciled regularly, typically at the end of each accounting period (monthly, quarterly, annually) to maintain accurate financial records.
Q3: Can a balance be both a debit and a credit?
A3: No, a balance is either a debit or a credit, depending on whether debits or credits total higher in the respective account.
Q4: What happens if the debits and credits don’t match?
A4: If debits and credits don’t match, it indicates an error in the accounting entries that must be investigated and corrected to ensure accurate financial records.
Q5: What is the difference between a balance and a trial balance?
A5: A balance refers to the difference between total debits and credits in a single account. A trial balance is a worksheet listing the ending balance of all ledger accounts to ensure the totals of debits and credits across all accounts are equal.
Related Terms
Trial Balance
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns. It ensures that the entries are mathematically correct.
Ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account typically has its own ledger.
Debit
In double-entry bookkeeping, a debit refers to an entry made on the left side of an account ledger to signify an asset, expenses, losses, or reductions in liabilities, equity, or revenue.
Credit
In double-entry bookkeeping, a credit refers to an entry made on the right side of an account ledger to signify liabilities, equity, revenue, income, or reductions in assets or expenses.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Michael P. Hanegan - A comprehensive guide to understanding financial accounting principles.
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper - A useful guide for beginners to grasp accounting basics.
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield - An in-depth resource for advanced accounting concepts.
Accounting Basics: “Balance” Fundamentals Quiz
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