Financial transactions increase or decrease your checking account and are a routine part of life. If you maintain an accurate check register, it details your true available balances. The available balance in your check register might not match your bank's version of your available balance. Unless you reconcile your accounts with your bank statement, it also might not match the bank's ledger balance.
In a checking account the ledger balance is updated by the financial institution at the end of each business day. It includes all deposits and withdrawals that posted within the previous 24 hours.
You likely use checks, debit cards, the Internet and even your phone to issue payments from your checking account. Even though your bank may receive notification of these payments throughout the day, your ledger balance remains unchanged during the day. This is because banks calculate ledger balances at the end of the business day, and this amount becomes the opening balance for the next day. The ledger balance of your checking account is the balance after the bank processes all of your transactions, including interest incomes, payments and deposits. As far as the bank is concerned, at the end of the day – literally – your ledger balance is the amount of money you have in your account.
Unlike the ledger balance, your available balance changes frequently throughout the day. As transactions hit your account, your available balance changes. It, therefore, represents your inflow and outflow of money, and your bank updates it as they receive information about your transactions. Your available balance will not include the check you just wrote, but it will likely include a recent automated teller machine withdrawal. To your bank, the available balance is the amount of money you have at a given time. If a check comes in at that given time and it's greater than the available balance, your account will be overdrawn, or the bank may return your check. Either way, your bank might assess an insufficient fund fee.
Sometimes the difference between the ledger and available balances creates confusion. When you look at your bank statement, you typically see the ledger balance for a specified time. Your bank obtains this amount by considering the difference between the total amount of money you deposited and your total withdrawals over the same period. This is different from the available balance, and the two balances might not match. Differences are usually due to amounts that have not cleared, such as outstanding checks or deposits made after business hours.
Bank Balance Considerations
Confusion about your checking account balances can lead to a false picture of your financial position. Simply put, a misunderstanding of the differences can lead to overdrafts in your account. Proper management of these accounts can help you track payments and receipts, and give you a clear picture of your cash flows, including income or payments that have not yet hit your bank's ledger balances. Computerized accounting software and spreadsheet applications can help you manage your checking account and make management of your money easier.