In connection with finance and economics, we definitely have to understand the meaning of balance. Because the balance will help us know how much or how many assets and bills we have. In this article, we will discuss the meaning of balance, types of balance, as well as the function of balance in an account.
Understanding Balance
We need to understand the meaning of balance based on several fields or concepts. The balance can be interpreted as the amount of bills that individuals or companies still have to pay. Meanwhile, in banking, the balance is the recorded amount of money that is or remains in a savings account.
In a digital wallet or bank account, the definition of balance refers to the assets owned by a person. However, the definition of balance will be different when on a credit card. When we deposit a certain amount of money into an account, the bank in question has a debt for the amount we deposited earlier, so the balance can be said to be the amount of the bill that must be paid.
Meanwhile, in the accounting process, the definition of balance can be interpreted as an estimate that a certain type of account will have a debit or credit balance based on its classification in the chart of accounts. Each account or account has a predetermined normal balance. These provisions are absolute or cannot be changed.
This balance will affect the increase or decrease in the amount of one account. This contains a provision that each account will always have its own balance and that debit and credit will be mutually exclusive.
When there is an addition or reduction, the amount will be affected by other accounts. Normal balance has a property or characteristic that when used it will pair, balance each other and influence each other.
Types of Balance
In the banking world, an account balance can be said to be an account balance . The remaining money in the account after being freed from fees is called the account balance.
Therefore, the nominal amount of money in the account has been reduced by all credits and debits. Balance savings or savings giro is the balance in an account. How much wealth a person has in a bank account is shown by the balance of his bank account
However, the bank account balance will not record transactions scheduled before the transaction date. Therefore, it cannot represent the net worth of an individual.
There are several types of bank balances that can be identified as follows.
1. Credit and debit balance in savings
When depositing money into the bank, the amount deposited will be on the credit side. But when withdrawing or sending money, the bank will record it on the debit side
This can happen because credit and debit in savings use the bank’s perspective, not the customer’s.
In accounting records there are two types of accounts, namely cash accounts and liabilities. Increased cash is recorded in the debit column, while decreased cash is recorded in the credit column.
When we deposit money with the bank, it means that the bank is entrusting a certain amount of money which must be paid to the customer at any time. The bank recorded it as a debt. Because it is recorded as debt, the nominal deposit we make is called credit.
On the other hand, when we withdraw money, it means that the bank’s debt to customers is reduced. So the bank records it as a debit side. So, we can understand a savings book as a record of the bank’s debts to its customers.
2. The balance settles in savings
The settled balance is the minimum nominal set by the bank to remain in an account. The amount deposited cannot be withdrawn by the customer and this amount depends on each bank’s policy.
The minimum balance or nominal deposit has the aim of providing security if one day the customer no longer uses their account and the account will be closed. This nominal amount is used by the bank to cover transaction costs.
3. Average daily balance
Average daily nominal is a nominal calculation carried out by the bank every day, to be precise at the end of the day when the bank carries out the batch process . Several banks use the daily average nominal calculation method to determine the interest calculations received by customers.
An example of a balance in a bank account is that an account has a nominal value of IDR 8 million as the initial balance . Then the account owner received funds from colleagues amounting to IDR 2 million, so the balance position at that time was IDR 10 million.
After that, the balance owner automatically schedules the next five days to be able to send money or investment funds to a mutual fund account amounting to IDR 3 million. So, on the fifth day the account owner’s account balance became IDR 7 million.
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Balance in Accounting Bookkeeping
Apart from the types of balances that have been explained previously, there are also types of balances in accounting bookkeeping as follows.
1. Normal balance of assets
For each account or account number, the amount of the balance will always be calculated first when making a financial report. Of course, under normal conditions the asset account balance between debit and credit will be greater on the debit side. This is because the normal asset balance is on the left/debit side.
Every company has assets, these assets are in the form of assets such as cash, banks, cash on hand, receivables, inventory, supplies, equipment, or something paid in advance. Apart from that, fixed assets such as land, buildings and machinery are one of the large assets owned by the company.
2. Normal balance of liabilities and equity
Liability/obligation accounts and also equity/capital under normal conditions will be on the right or credit side. So it is not surprising that the amount between credit and debit will usually be higher than credit. If it is on the debit side, then the company’s finances are not in normal condition.
Liabilities are a number of debts owned by the company that must be paid to other parties both now and in the future. Usually company obligations have different maturities. This is different from capital which becomes wealth, is used when building a business or becomes the initial use of a company.
3. Normal balance of income and expenses
Income will increase the assets owned by the company. However, on a real account, income recording is on the right. This is because when we get money, it will of course be recorded on the left or debit side, and as a balancing note it will be written next to the credit. It is not surprising that the account’s normal balance is in credit.
This income can be the amount of money received due to the activity of selling goods or services. Meanwhile, expenses are a deduction that will produce a profit after deducting existing income.
4. Normal balance of expenses
What expense account is next to the debit for the reason when the company spends money, in the balance it will be written next to the debit. This causes the normal expense account to be debited.
This expense includes all costs incurred by the company for anything. For example, for expense accounts, namely administrative expenses, sales expenses such as purchase transportation promotions, shop rentals, and so on.
Balance Function in Bookkeeping
Following are several functions of balances in bookkeeping.
1. As a rule in accounting records
In order not to make mistakes in making reports, it is necessary to prepare financial reports properly and correctly. This rule applies to the recording of debit positions and credit positions which result in additions or reductions.
2. Determine the debit and credit balance
The accounting system certainly has a debit and credit side, where this position determines the position of the balance in the report. So this position can show the existence of asset, income, liability, capital and other positions.
3. Procedures for recording debits and credits
The procedure for recording debits and credits is due to transactions on the left according to the account in question. In addition, this procedure can help group transaction records, such as normal balance liability accounts on the right while income on the left.
4. Grouping real accounts
Real accounts include balance sheets in the form of assets and activities, where assets such as supplies, equipment and so on. So the real account will usually increase in debit and decrease in credit.
5. Grouping nominal accounts
A nominal account is an account that includes income and expenses. Where nominal income is recorded on the credit side and expenses on the debit side.
6. Can more easily read asset and liability accounts
If a company has a lot of assets, it means it has made a profit, it is easy to find out what the normal balance is in the assets on the left.
When the asset balance is next to credit, it indicates that finances are experiencing expenditure. Vice versa, using the normal balance principle can make it easier for us to read financial reports.
Example of Bank Account Balance
We can understand if the account balance position is clean after being freed from debits and credits and other additional costs.
1. Check your bank account balance
How to check bank balances is now getting easier with the many banking facilities for transactions. Checking account balances can be done at ATM machines, mobile banking applications, or internet banking issued by the bank.
2. Balance on credit card
If a bank account shows the balance a person has after deducting fees, the balance on a credit card is different. The balance on a credit card shows the total debt or loan a person has made.
The total balance on a credit card is an accumulation of debt transactions that have been carried out previously. The balance on a credit card will decrease after the card holder pays the bill. Meanwhile, in credit cards we also know available credit or remaining credit.
The remaining credit shows the credit limit that someone can use for transactions. So, don’t confuse your credit card balance with available credit .
3. Balance in accounting
Balance in accounting is the difference between total debits and total credits entered in a period. The balance in an accounting period reflects the net value and liabilities.
When the total debit exceeds the total credit, it will show a debit balance . Vice versa, if the total credit exceeds the total debit, the account shows a credit balance.
The trial balance in accounting must be balanced where the total debit balance and total credit balance are the same. If an unbalanced trial balance is found, it means there is an error in the calculation.
Benefits of Having a Balance in the Bank
There are several benefits we get when we have a bank balance, including:
1. Earn interest
When you have a balance at the bank and in a piggy bank or any object at home, the difference is the balance, because every customer who saves will get interest.
Earning interest is one of the advantages of having a bank balance, namely being able to manage your financial conditions as best as possible. However, the interest earned and added to the savings balance may not be so noticeable. So we will be happy if the interest can cover bank administration costs every month, the savings balance will not decrease.
2. Tends to be safer
Having a balance at the bank will be safer than keeping it yourself at home, so it will further minimize the risks involved. Security is certainly the main reason why many people choose to have a balance in a bank rather than keeping it themselves.
Because banks have multi-layered security systems, both physical and non-physical. The bank guarantees the balance in the bank, so it will be safer.
3. Have many transaction options
When we have a balance in the bank, we can make transactions freely. Not only that, convenience is increasingly within your grasp if you take advantage of mobile banking or internet banking.
Various facilities can be accessed 24 hours every day anywhere and anytime. Having a bank balance is not just about saving money, but can make various transaction activities easier, such as paying installments, internet quota, or buying credit and so on.
4. Easy and practical
Having a balance at the bank doesn’t require the hassle of keeping track of how much money is saved. Because the recording system is automatic and will be displayed in the account or savings book.
To find out your savings balance, you can do it at the nearest ATM or via smartphone by downloading and installing mobile banking , so you can do it at any time without hassle and without having to queue long. Apart from being practical and easy, it can also save time.
5. Financial management becomes more planned
Managing money or balance in the bank can control every income and expenditure well. Movements in and out of money can be checked at any time by looking at the savings book or by asking for a bank statement that is printed every certain period, for example once every three months.
6. Investment alternatives
Investment is a way to get income or money. There are many types of investments that can be carried out. However, every investment action has its own risks. When saving/accumulating balances, there is no risk so the balance will remain safe and intact but you will not get profits like investments.
Disadvantages of Having a Balance in the Bank
Even though it has many advantages or disadvantages, there are several disadvantages that we experience when we have a bank balance, including:
1. Has transaction fees
Transaction fees will be charged when we make a transaction. For example, such as sending money to account holders at different banks or making certain purchases or payments. However, there is no need to worry because transaction fees vary and are quite affordable.
2. The value of the balance in the bank is difficult to increase
Savings interest generally ranges from a maximum of one percent. As an alternative, you can choose a term deposit. The increasing balance is usually from cash deposits or incoming transfers received, not from savings profits.
3. There are transaction limits that limit
Each bank has its own limit for each type of savings to be chosen. One of them is the minimum balance that must be available in a savings account. There are also daily cash withdrawal limits at ATMs or certain payments and purchases.
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Trial balance
A trial balance is an activity to test the correctness of debit and credit balances in ledger accounts by arranging ledger account balances in a list.
This activity is carried out at the end of a certain accounting period in the following way.
- Add up each ledger account on both the debit and credit sides.
- Differ the amount on the debit side with the amount on the credit side to find the balance of the account.
- Arrange the balances into a list called a trial balance.
This is an overview of the meaning of balance, types and functions of balances in accounts. If Mudalovers still needs references regarding balances or accounting, savings, and others, then you can get the articles at mudabicara.com. We will always provide the best and most complete articles for Mudalovers, so that you have the best information.