What is Balancing the Books? (with Examples)
Balancing the books may sound daunting and exhausting task, but it is highly crucial for larger or small businesses. Balanced accounts provide business owners with the foundation they need to make informed forecasting choices about expanding their business, incurring large expenses, taking financial decisions or hiring new employees.
Additionally, if you are just starting out with bookkeeping, you need to understand key fundamentals related to balancing the books.
In today’s guide, we have thoroughly discussed about balancing the books. Let’s take a look at what we’ll study ahead:
Significance of Balancing of Books
Difference between Book Balance and Bank Balance
Generating and Balancing the Books
How you Can Balance the Books?
Let’s Start!
Understanding Book Balance
The book balance consist of all transactions that a company does within an accounting cycle, such as a fiscal or quarter year.
Usually, book balance is employed to control the finances in a business's checking account. The book balance and bank statement are compared at the conclusion of an accounting period to see if the amount of money in the bank account equals the book balance.
For instance, if a business issued multiple checks, those sums would be shown in the book balance and would be compared to the cash balance in the bank account at the conclusion of the accounting period.
Significance of Balancing of Books
Balancing of books holds major significance for all companies or small business owners. You can easily ascertain the financial status of your company or business when you keep an accurate bookkeeping system.
If a company or business is booming— it signifies that the sum of assets is higher than liabilities. Further, it means that the value of your company's equity, or stock, will rise if business is thriving, and new financing options might become accessible.
Furthermore, your chances of being approved for a small business loan to fund future expansion are higher if your balance sheet demonstrates that your company's net worth has increased steadily over time. As an alternative, individual investors might be interested in purchasing your stock.
However, there are additional advantages to putting in place an excellent bookkeeping system, such as understanding whether you have room for expansion.
For instance, let's say Alice wants to purchase a larger piece of property in order to open her bakery shop business. She can check her balance sheets from the prior quarters' first and third quarters to see if she has enough cash on hand or equity to make a down payment on a home.
Additionally, if you begin routinely balancing your books, you'll be able to spot trends.
Suppose, in Alice's situation, she can also observe any swings in her business. For example, she may notice a spike in demand in the few months due to holidays or vacations.
By doing this, she can be sure that her company is still on course for annual growth even if few months see a little decline in demand for her services.
Difference between Book Balance and Bank Balance
Look at the table below for an explanation of the main distinctions between book balance and bank balance. As we learn:
Difference between Cash Book Balance and Bank Statement Balance | |
The cash balance recorded by the corporation or company in their company's cash book is known as cash book balance. | The balance on the bank statement is the cash balance that is recorded by the bank in bank records. |
Reflected Transactions | |
The cash book balance includes transactions that are not represented in the bank balance. | The balance on the bank statement includes transactions that aren't represented in the cash balance. |
Transactions Example | |
Deposits in transit and unpaid checks are two instances of transactions that are reported in the cash balance but not the bank balance. | A few examples of transactions that are reflected in the bank balance but not the cash amount are service fees, interest income, and returned checks. |
In conclusion, because some transactions were recorded by the business or the bank, there is a discrepancy between the balance in the cash book and the balance on the bank statement.
Such anomalies are frequently noticed because of delays in transaction processing and ignorance of some costs that the bank has credited to the corporate account. To fix these discrepancies, a bank statement needs to be prepared.
The book balance and the bank balance of a corporation, however, might diverge in a number of circumstances.
Service Charge
A company's bank account may have had account service fees debited out of it during the month and at the end. Until the month-end figures are reconciled with the bank, the debits would not be reflected in the book balance.
Interest Earned
At the end of the month, the business's bank account is typically credited with interest collected on accounts, which is then paid on the cash balance. The money for the interest may come from a savings account or a cash sweep, in which case the bank puts idle cash from a business's checking account into short-term securities. The cash sweep enables the business to make interest on its unused capital.
Therefore, until the interest is deposited and the bank accounts have been totaled, the interest created will not appear in the book balance.
Float Funds
A deposit is typically made, the depositor is given access to the money, and the check clears before the paying bank is charged. Therefore, until the clearing procedure is finished, the funds—known as float funds—are temporarily added twice. The time that passes between making a deposit and withdrawing money also contributes to the accumulation of float funds.
Uncleared Checks and Deposits
Those checks that have been written but haven't yet been paid by a financial institution. The bank account balance would not currently reflect these deductions, but the book balance would. The company's book balance will be less than the bank balance up to that point since the checks haven't been delivered to the payor's bank for payment to the payee and deposited into the payee's bank.
Adjustments and Errors
Due to mistakes in bank transactions that need to be fixed, the book balance and bank balance may occasionally change. If there weren't enough funds on a check that was part of a deposit, the bank would take the money from the business's checking account.
The book balance and bank balance may fluctuate from time to time due to errors in bank transactions that need to be corrected. The bank would deduct the monies from the company's checking account if a deposit check did not have sufficient funds.
To reconcile a company's financial records and book balance with the banking activity for an accounting period, a bank reconciliation statement can be created.
Generating and Balancing the Books
If you are an amateur when it comes to generating balance sheet and balancing the books. Then, you must not worry because we are here to help you out with it.
Choosing your accounting period is your first step, obviously. The majority of firms balance their books every month or every three months. When you're first starting out, balancing your books once a month will make the job easier to handle.
Simply put two columns of numbers on a piece of paper with assets on one side and obligations on the other if you want to start out very simply and employ a cash accounting system, as many small-business owners do. The sum of the values in each column, less the liabilities from the assets, should equal the equity of your company.
Since most banks allow you to download account information straight into the programme, accounting and bookkeeping software like Deskera helps streamline your bookkeeping.
Now, the only thing left to do after loading the data is to go through the entries and make sure each one is categorized appropriately. This procedure is made simple and effective by maintaining a separate business bank account.
How you Can Balance the Books?
It's possible that your company's equity does not immediately equal the amount that remains after subtracting liabilities from assets. Even significantly different possibilities exist. At this point, it would be tempting to give up. But don't give up-—just as you wouldn't abandon your studies before exams.
You are currently in the phase of bookkeeping known to accountants as creating a trial balance. This lets you know if there are any errors in your record-keeping, which you can fix now rather than at the end of the year when it's more difficult to do so. At this point, even seasoned pros anticipate making corrections.
Before looking for issues, make sure you haven't listed the same entry twice or overlooked to record it in either column. If not, try looking for a few typical accounting mistakes. You might have transposed two digits if there is a difference of nine digits or fewer.
Transposed numbers, such 750 instead of 570, always have a difference that may be divided by 9. An addition or subtraction error may have been made in one of your columns if the difference is a multiple of 10 (100, 1,000, etc.).
Example of Balancing the Book
Let's say Company X sends Company Y a check on August 25.The debit would not show up on the month-end bank statement if Company X did not deposit it by the end of August. As a result, even if those funds have been used, X's bank account would show that they are still available.
Contrarily, funds received by Company X from Company N have been noted in the book balance but have not yet appeared in the bank balance since they were not deposited in a timely manner prior to the release of the bank's month-end statement.
In order to manage its cash flow activities and make sure it has enough money to function efficiently, Company X must keep records of its outstanding debits and credits.
How Deskera Can Assist You?
Deskera Books can help you automate your accounting and mitigate your business risks. Creating invoices becomes easier with Deskera, which automates a lot of other procedures, reducing your team's administrative workload.
Final Takeaways
This brief guide has now come to a close. As a result, for your future reference, we've created a summary of essential points from this guide:
- Balanced accounts provide business owners with the foundation they need to make informed forecasting choices about expanding their business, incurring large expenses, taking financial decisions or hiring new employees.
- Balancing of books holds major significance for all companies or small business owners. You can easily ascertain the financial status of your company or business when you keep an accurate bookkeeping system.
- Your chances of being approved for a small business loan to fund future expansion are higher if your balance sheet demonstrates that your company's net worth has increased steadily over time. As an alternative, individual investors might be interested in purchasing your stock.
- A company's bank account may have had account service fees debited out of it during the month and at the end. Until the month-end figures are reconciled with the bank, the debits would not be reflected in the book balance.
- A deposit is typically made, the depositor is given access to the money, and the check clears before the paying bank is charged. Therefore, until the clearing procedure is finished, the funds—known as float funds—are temporarily added twice.
- Due to mistakes in bank transactions that need to be fixed, the book balance and bank balance may occasionally change. If there weren't enough funds on a check that was part of a deposit, the bank would take the money from the business's checking account.
- Choosing your accounting period is your first step, obviously. The majority of firms balance their books every month or every three months. When you're first starting out, balancing your books once a month will make the job easier to handle.
- Make sure you haven't listed the same entry twice or overlooked to record it in either column. If not, try looking for a few typical accounting mistakes. You might have transposed two digits if there is a difference of nine digits or fewer.
- Since most banks allow you to download account information straight into the programme, accounting and bookkeeping software like Deskera helps streamline your bookkeeping.