Ledger balance: What it is, how it works, and beginner tips

Being a solopreneur means going beyond the basics of small business accounting and becoming an expert on your personal and professional finances. Knowing your ledger balance, for example, can help you budget for business expenses.

Understanding the intricacies of a ledger balance is crucial for solopreneurs, as it allows you to track financial transactions accurately, monitor cash flow, and make informed decisions regarding investments, costs, and savings. 

Our beginner-friendly guide will show you the practical applications of knowing your ledger balance in everyday financial management.

What is a ledger balance?

A ledger balance represents the daily calculated balance of an account, considering all pending and completed transactions. Pending transactions include payment methods, like checks, wire transfers, deposits, and bank card charges that have been initiated but not yet fully processed.

The ledger balance is crucial to how banks assess your account, serving as the figure they consider for determining your minimum balance requirement. This becomes especially significant if your account type necessitates maintaining a specific amount to remain an account holder or qualify for cashback rewards.

How a ledger balance works

A ledger balance is calculated at the end of every business day. Banks calculate the sum of your credits, debits, and transfers, and the ledger balance will be your starting balance for the next business day.

Typically, financial institutions automate the task of calculating the ledger balance. However, you also have the option to manually calculate it, providing an additional layer of oversight and control over your accounting ledgers.

Understanding and monitoring your ledger balance can help you avoid costly financial pitfalls such as overdraft fees, bounced checks, and insufficient funds for automatic bill payments. By incorporating the ledger balance into your financial management routine, you gain greater control over your budget and ensure smoother financial operations.

How to calculate a ledger balance

The ledger balance formula calculates the balance of an account by adding the opening balance to the sum of credits and debits. Let’s break down each input:

• Opening balance: The balance in an account at the start of a business day.
• Credits: Credits encompass deposits, reversals, or any other inflows of funds or assets into the account, contributing to an increase in the account balance.
• Debits: Withdrawals, transfers, or any other outflows of funds or assets from the account, leading to an account balance decrease.

This equation provides a snapshot of the account's financial status for effective analysis and decision-making.

Here is the step-by-step process of how to calculate your ledger balance manually.

1. Find your opening balance

Begin by identifying the opening balance of your account, which represents the amount available at the start of the accounting period. This figure serves as the foundation for calculating your ledger balance, and you can find it by referencing your previous day's closing balance or the starting balance of the current period. 

2. Add your credits

Next, incorporate any credits or inflows into your account since the opening balance. This includes deposits, reversals, or any other transactions that increase your account balance. By adding these credits to your opening balance, you can determine the total funds available. 

3. Subtract your debts

Finally, subtract any debits or outflows from your account during the accounting period. This includes withdrawals, transfers, or any other transactions that decrease your account balance. By subtracting these debts from the total balance, you arrive at your ledger balance, providing a clear snapshot of your account's financial status. 

Ledger balance vs. available balance

Understanding the difference between account balance terminology is crucial to maintaining your financial health. Here are the main differences between an available balance and a ledger balance:

Available balance

The available balance represents the total amount of funds accessible for withdrawal from your account at any given moment. An available balance provides real-time information, accounting for cleared transactions and pending holds, offering a current snapshot of your financial liquidity and enabling informed decision-making regarding withdrawals and expenditures.

Ledger balance

Unlike the available balance, the ledger balance remains constant throughout the day, reflecting the opening balance along with credits and debits but not real-time transactions. It serves as a static representation of your account's financial position, offering a baseline figure to assess your account's overall balance and track changes over time.

Ledger balance example

Imagine a solopreneur, Phoebe, who runs an online boutique selling handmade jewelry. Let's say her ledger balance today is $5,000. Throughout the day, she receives online orders and makes purchases for her business. With each transaction, she updates her ledger to reflect the changes in her account balance. 

For instance, if she spends $500 on new materials for her jewelry designs, she subtracts this amount from her ledger balance at the end of the business day, leaving her with $4,500. Phoebe also records pending transactions, such as customer payments that have not yet cleared. By monitoring her ledger balance closely, she ensures she has enough funds to cover upcoming expenses and avoids overdraft fees or bounced checks. 

Streamline your accounting and save time

Knowing how your ledger balance can potentially protect you from paying costly overdraft fees and more. That’s why investing in accounting software is so important for your business.

From organizing your financial statements to maintaining your account balances, understanding how a ledger operates is one of the most important steps in being a successful solopreneur.