Average Collected Balance

What Is Average Collected Balance?

The average collected balance is the average balance of collected funds (less any uncleared or uncollected deposits) in a bank account over a specified period, usually one month. The average collected balance is calculated by summing all of the daily collected balances in the period and dividing by the number of days in the period.

Understanding Average Collected Balance

Banks use the average collected balance to determine the amount of interest they pay each month to their account holders. Collected funds are those funds that have cleared the bank and represent the available portion of the bank deposit. Collected funds earn interest, while uncollected funds do not earn interest.

Uncollected funds are deposits that the bank has not yet reconciled. An example of this would be when an account holder has deposited a check, but the funds have not yet cleared the banking system. The funds must be transferred from one financial institution to another. Once the check clears, the funds will then be included in the average collected balance for the account.

For most individuals, the difference between the average daily balance and average collected balance will be small. However, for businesses or enterprises that conduct numerous transactions for large amounts of money each month, it may be quite significant. Banks must carefully calculate the average collected balance to ensure they pay the correct interest to their account holders.

Banks typically put a hold on deposited checks for large amounts, coding them as "UCF" or "UF" for uncollected funds. However, they may make a portion of the deposit available immediately if the customer is in good standing with the bank.

Calculating Average Collected Balance

When calculating the average collected balance for an account, banks do not consider any uncleared or uncollected deposits. The bank adds all the daily collected balances in the period (usually a month) and divides this sum by the number of days in the period. The result is the average collected balance for the period.

Average Collected Balance and Types of Customer Accounts

Commercial banks pay interest on customer deposits. Many forms of deposit accounts exist, including checking accounts, savings accounts, call deposit accounts, money market accounts, and certificates of deposit (CDs).

Checking accounts allow both withdrawals and deposits (and are also called demand accounts or transactional accounts). Savings accounts are also deposit accounts that provide a modest interest rate. Banks or financial institutions may limit the number of withdrawals a customer may make from a savings account each month. The institution may also charge fees if the customer does not maintain a certain average monthly balance. In most cases, banks do not provide checks with savings accounts.

Call deposit accounts offer the advantages of both a savings and a checking account, while money market accounts may be types of mutual funds, which offer baskets of money market instruments. CDs are a savings certificate with a fixed maturity date and specified fixed interest rate.

Average Collected Balance and Interest Income

Interest due to the owners of certain deposit accounts are liabilities to the bank. They are liabilities because they represent a financial obligation the bank has to the owner of the deposit account that the bank has not yet paid. The average collected balance represents the full amount for which the bank must pay interest (excluding any uncollected funds).

Commercial banks earn revenue, based on the amount they hold in collected balances. With these funds they are able to provide loans, including mortgages, auto loans, business loans, and personal loans. A commercial bank may specialize in just one or a few types of loans. The interest rate the bank pays on these funds that they borrow is less than the rate charged on the money they lend. This spread equals the net interest income, or profit, that a commercial bank earns.