Difference Between Ledger Balance and Available Balance
The ledger balance and available balance are two different ways of representing the amount of money in a bank account, and they can often be different due to pending transactions or holds placed on the account.
Ledger Balance, also known as the current or account balance, is the balance that represents the total amount of funds in your account at the beginning of the day. This balance includes all deposits and withdrawals that have been posted to your account. It doesn’t include checks that have been written but not yet cleared, or deposits that have not yet posted. In terms of accounting, it’s somewhat similar to a book balance.
Available Balance, on the other hand, is the amount of money in your account that you can use or withdraw at any given moment. The available balance takes into account things like holds placed on deposits, pending transactions that have been authorized but not yet posted, and check holds. So, the available balance can change throughout the day as deposits are made, checks clear, and debit card transactions post.
For example, let’s say you have a ledger balance of $1,000 in your account. You then write a check for $200, but it hasn’t cleared yet. You also make a deposit of $500, but it’s on hold and hasn’t been cleared by your bank. Your ledger balance remains $1,000 (because the check and deposit haven’t cleared), but your available balance would be $800 ($1,000 – $200 from the uncleared check).
It’s important to manage your finances based on your available balance, not your ledger balance, to avoid overdraft fees or bounced checks.
Example of the Difference Between Ledger Balance and Available Balance
Let’s say John has a bank account and he wants to understand his ledger balance and available balance.
On July 1st, the bank shows that John has a ledger balance of $1,500.
Here are some transactions that John does:
- On July 1st, he deposits a check of $500. But his bank places a two-day hold on this check to ensure it clears, so it doesn’t immediately add this amount to his available balance.
- On July 2nd, he uses his debit card to buy a new laptop for $700. This transaction is authorized immediately, but it hasn’t posted yet (i.e., the merchant hasn’t finalized the transaction).
- On July 2nd, he also writes a check of $300 to pay for his utilities.
So here’s how John’s ledger balance and available balance look:
July 1st:
- Ledger balance: $1,500 (his starting balance)
- Available balance: $1,500 (since no transactions have cleared yet)
July 2nd:
- Ledger balance: $1,500 (his deposit hasn’t cleared yet, and his debit card purchase and written check haven’t been processed yet)
- Available balance: $800 ($1,500 – $700 for the authorized laptop purchase; the written check hasn’t cleared yet, and the deposit is still on hold)
Once all transactions have cleared (the check deposit is verified, the debit card purchase posts, and the written check clears), both the ledger balance and the available balance will reflect these transactions. However, during the processing time, the available balance provides a more accurate reflection of the funds John has at his disposal.
