Talking about banks or ATMs, perhaps one term that is not so foreign is balance. Yes, the use of the term balance refers more to the remaining money in a bank account. However, who would have thought that the definition in the world of credit and the world of accounting is different, you know ?
It turns out that in the banking world, balances are divided into several types and of course each type of balance has different meanings and characteristics. Therefore, so that you don’t wonder what a balance is, this article will explain more fully about balances.
So, what are you waiting for, let’s read this review until the end, OK?
Understanding Balance
In order to be able to answer the question what is a balance, of course we have to know the meaning of balance from several fields or concepts. The balance can be interpreted as the amount of bills that must be paid by an individual or company. In the world of banking, balance can be interpreted as the amount of money recorded or the remaining money in the savings account of each related party.
In digital wallets or bank accounts, the balance refers more to the assets owned by each individual. However, it turns out that the meaning of balance in the world of credit or credit cards is different, you know. Where the balance on a credit card can be interpreted as the amount of the bill that the account owner must pay to the bank.
Meanwhile, in the world of accounting, balance can be interpreted as an estimate of certain types of accounts that have debit or credit balances based on their classification in the chart of accounts. Where each account will have a predetermined normal balance. This decision is absolute and cannot be changed.
Apart from that, the balance also influences the increase or decrease in the amount of one account. There is also a provision that each account will have a personal balance and mutual continuity between debit and credit.
When there is an increase or decrease in the amount that is influenced by another account. So, this condition can be interpreted as a normal balance that will have a characteristic or characteristic that when used it will pair and balance each other and will also have a mutual influence on each other.
Understanding Credit Card Balance
Previously we briefly explained what a credit card balance is. However, in this point we will discuss more specifically what a credit card balance is.
The balance on a credit card can be interpreted as when the bank account shows the balance that each person has after deducting certain fees, the balance on the credit card will also be different. The balance on this credit card will show the total debt or loan that a person has made.
Then, the total balance is the accumulation of debt transactions that have been carried out previously. The balance on the credit card will decrease when the credit card owner processes the bill payment.
Understanding Balance in the World of Accounting
Then there are also balances in the world of accounting. Balance in the world of accounting is the difference between total debt and total credit which will then be included in a period that can show the net value and liabilities.
When the total debit exceeds the total credit, the account will show a debit balance. This also applies if the total credit exceeds the total debit, the credit balance will be shown.
In this condition, it usually involves a balance sheet, where the total balance and credit balance must be in a balanced or equal condition. If it is found that the trial balance is not in a balanced condition, then it is certain that this has occurred in the calculation process.
Meanwhile, for the balance state, it is an activity carried out to test the correctness of the debit and credit balances of ledger accounts by arranging them in a list.
Read Also : What is Quick Ratio? Definition, Formula and Advantages
Types of Balances in the World of Banking
In the world of banking, balance can also be called account balance. The remaining money in the account after being free from any fees can be called the account balance. This will present the nominal amount of money in the account which has also been reduced by all types of credits and debits.
Then, balance savings or savings deposits can be referred to as the balance in the account. And later the amount of a person’s wealth in a bank account can be determined by looking at the bank account balance.
However, bank account balances cannot record every transaction scheduled before the date the transaction occurs. Therefore, the existence of a bank account balance cannot be interpreted as a person’s net worth.
There are several types of bank balances that you can know about, namely as follows.
1. Credit and Debit Balance in Savings
When someone makes a deposit to the bank, the amount deposited will be in the credit side area. However, when someone makes a withdrawal or transfers money, the bank will record it in the debit area.
This can happen because the credits and debits in savings are taken from the bank’s perspective, not from the customer’s perspective. When carrying out accounting records, there are two types of accounts, such as cash accounts and debt accounts. Cash that has increased will be recorded in the debit column. Meanwhile, special items that experience a reduction will be recorded in the credit column.
When we carry out the process of depositing money with the bank, this can mean that the bank gets custody of the money and at a certain time the money must be paid to the customer.
In this condition, the bank will also record it as debt. Because it is recorded as debt, the nominal deposit made by the customer will be referred to as credit.
Likewise, when we withdraw money, it can be interpreted as a reduction in debt from the bank to customers. This will cause the bank to record it as a debit side. That way, we can also understand that the savings book is a record of the bank’s debts to customers.
2. Balance settles in savings
The balance deposited in the account is the minimum nominal value set by the bank which must remain in an account. Where the amount that has been deposited cannot be withdrawn by the customer and the amount of the nominal balance that has been deposited also depends on the party. This means that each bank has a policy regarding the nominal balance deposited in an account.
This minimum balance or nominal deposit has the aim of being a form of security if one day the customer no longer uses the account and the account closing process will be carried out. This nominal amount can be used by the bank as a form of covering transaction costs.
3. Daily Average Balance
Daily average nominal is a nominal calculation that will be carried out by the bank every day or more precisely at the end of the day and when the bank will carry out the batch process. Some banks usually use the daily average nominal calculation method to determine interest calculations before they are received by the customer.
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Read Also : What are Assets? Definition, Types and Examples
Balances in the World of Accounting
Balances in the world of accounting are also divided into several categories. In general, these categories are divided into four types, namely nominal asset balances, normal balances of liabilities and equity, normal balances of income and costs and normal balances of expenses.
Where each category of balance in the world of accounting will have a different meaning and function. To better understand, here is a complete explanation.
1. Normal Balance of Assets
For each account and account number, the amount of the existing balance will be calculated first when preparing a financial report. Under normal conditions, the debit and credit balances between asset accounts should be greater on the debit side. This is because the normal asset balance will be on the debit side or on the left.
Every company in this world always has assets. These assets can be prices such as cash, bank, cash on hand, receivables, inventory, supplies, equipment or something that can be paid in advance. Apart from that, assets in fixed form such as land, buildings and machinery can be one of the large assets owned by a company.
2. Normal Balance of Liabilities and Equity
Liability accounts can also be called liabilities and equity or capital under normal conditions will be on the right (credit). Because of this, the amount between credit and debit will be in a higher credit position.
If the liability account is on the debit side, then the company’s finances are not in normal condition. Liabilities as the amount of debt owned by the company must be paid to other parties, both now and in the future.
In addition, each company has different maturity obligations. This is different from capital which becomes wealth and can be used when building a business.
3. Normal Balance of Income and Expenses
The income will be able to increase existing assets in the company. However, on a real account, the income recording will be on the right. This can be related because when we get money, the recording process will be on the left or debit side and to balance the note it will be written on the credit side.
This income can be in the form of the amount of money received due to sales activities of goods and services. Meanwhile, expenses are deductions that can produce profits after deducting existing income.
Banks and financial institutions are two institutions that cannot be separated from each other. Want to know more about these two institutions? You can find out in the Bank & Financial Institutions book. This book discusses material that covers the basic concepts of financial institutions in depth.
4. Normal Balance of Expenses
The expense account will be next to the debit. This is because when the company spends money to balance it, the account expense account is written next to the debit. These expenses can include all forms of costs incurred by the company of any type. For example, for administrative expenses, sales, promotions, shop rental and other things.
Read Also : What is a Nominal Account? Definition and Differences
Benefits of Having a Balance in the Bank
Did you know that having a bank balance actually provides several benefits. The explanation for having a balance at the bank is as follows.
1. Earn Interest
Having a balance at the bank and at home certainly has quite fundamental differences. Apart from the place, it turns out that the balance in the bank can earn interest, you know. This means that customers who have savings at the bank will receive interest.
It cannot be denied that interest is one of the main attractions when having a bank balance. This will also make it easier for customers to manage their financial conditions. However, the interest earned and added to the savings balance may not be very visible. Even the balance in the bank can cover existing administration costs without needing to cut into the savings we have.
2. Safer
We cannot know when evil will come. Therefore, we also have to be more careful in everything, including saving money. Compared to saving money at home, it would be better if we kept it in the bank.
Because it could be that when we are at home, the money we save will be stolen by someone else. However, when at the bank, it is certain that security factors will also be maintained more strictly to prevent theft from occurring.
Be it physical or non-physical security, the bank has guaranteed every type of possibility of theft. This better security compared to keeping money privately at home is what makes many people prefer to keep their money in the bank.
3. Many transaction service options
When we have a balance at the bank, of course we can easily carry out various types of transactions. Not only that, the transaction process will also be easier because now every bank has an application specifically for this service.
Various types of facilities can be offered by mobile banking applications and used by users 24 hours non-stop, anywhere and anytime. Having a balance in the bank is not just savings.
However, having a balance at the bank will also make it easier for us to carry out transaction processes, from paying various types of bills to transferring money to other accounts.
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4. Easier and more practical
When we save money at home, maybe what will happen is that we will feel tired because we have to write down how much money we have saved. However, the story is different when we save money in the bank because there is an automatic recording system so it can be displayed in each customer’s account book.
Even just to check the savings balance, each customer can check at the nearest ATM machine or use the mobile banking application. This will make it easier for customers to check their balance without having to queue in long queues. Of course, it’s not only practical, but also easier and time-saving.
5. Financial Management Becomes More Planned
Managing money or balances at the bank makes it easier for us in the process of controlling incoming and outgoing funds. Each customer can check incoming and outgoing movements by looking at the savings book or asking for your account to be printed every certain period, such as every one or three months.
6. One form of alternative investment
Investment is one way for us to earn income. There are many types of investments that each customer can choose. However, you also need to know that each type of investment has its own risks. Even though when we save at the bank the balance remains safe, the profits we get will not be like investments.
That is the discussion about the meaning of balance and the types of balance in banking. Hopefully all the discussion above is useful for you, Mudalovers.