Book Balance

What Is Book Balance?

Book balance is a company's cash balance according to its accounting records. Book balance can include transactions that have yet to settle or clear through the bank account. Book balance reflects the funds that a company owns after adjustments have been made for checks that have yet to clear, deposits in transit, or other pending deductions from an account.

In other words, the book balance represents a running tally of a company's account balance when considering all transactions, some of which have yet to be reconciled through the bank account.

Ensuring an accurate book balance can help companies manage the monthly cash flow activities, which includes cash coming in and cash being paid out from the company.

Understanding Book Balance

Book balance includes transactions that a company has done during an accounting period, such as one quarter or a fiscal year. Typically, book balance is used to manage the cash within a company's checking account. At the end of an accounting period, the book balance is reconciled with the bank statement to determine if the cash in the bank account matches the book balance.

For example, if a company wrote out several checks, those amounts would be reflected in the book balance, and at the end of the accounting period, they would be reconciled with the cash balance in the bank account.

Book Balance vs. Bank Balance

The bank balance is a company's cash position in a company's bank account as reported at the end of the month, according to the bank statement. When debits and credits are processed through the bank account, those amounts are reflected in the bank account's cash balance. However, there are several scenarios when the book balance can differ from a company's bank balance.

Service Charges

Bank account service charges might have been deducted from a company's bank account throughout and at the end of the month. Those debits would not be recorded in the book balance until the month-end numbers are reconciled with the bank.

Uncleared Checks and Deposits

Checks that have been written and sent out but have yet to clear through the banking system. These deductions would be reflected in the book balance while not yet reflected in the bank account balance. As a result, a company's book balance would be lower than the bank balance until the checks have been deposited by the payee into their bank and presented to the payor's bank for payment to the payee.

Float Funds

Typically, a deposit is recorded, and the cash is made available to the depositor before the check has been cleared and debited from the paying bank. As a result, the funds — called float funds — are temporarily counted twice until the clearing process is complete. Float funds occur due to the time gap between a deposit and a withdrawal and delays in processing checks.

Interest Earned

Interest earned on an account is often paid on a company's cash balance and is credited to the bank account at the end of the month. The interest could be from a savings account or a cash sweep, which is when the bank withdraws unused funds in a company's checking account and invests that money in short-term investments. The cash sweep allows the company to earn interest on their idle cash.

As a result, the interest earned would not be reflected in the book balance until the interest has been credited and the bank account reconciliation has been performed.

Adjustments and Errors

From time to time, there are errors and adjustments that need to be made to bank transactions that would lead to discrepancies between the book balance and bank balance. If a check included in a deposit had insufficient funds, the bank would withdraw that money out of the company's checking account.

Also, a deposit could be recorded incorrectly in a company's book balance resulting in the amount received by the bank not matching the company's accounting records. The result would lead to a higher book balance than the bank balance. Also, sometimes the bank can make an error and record a transaction incorrectly, leading to an inaccurate bank balance.

A bank reconciliation statement can be prepared to summarize the banking activity for an accounting period to be compared to a company's financial records and book balance.

Reconciling the book balance with the bank balance can help companies identify discrepancies, errors, and fraud so that corrective measures can be taken.

Example of Book Balance

Suppose Company ABC writes a check on May 25th to Company XYZ. The month-end bank statement would not reflect the debit if Company XYZ did not deposit it before the end of May. As a result, ABC's bank balance would appear as if those funds are still available when, in fact, they have been spent.

Conversely, money received to Company ABC from Company LMN has been recorded in the book balance but has yet to show in the bank balance since the funds were not deposited in time before the bank's month-end statement has been produced.

As a result, Company ABC must keep track of its pending debits and credits to manage its cash flow activities to ensure it has enough funds to operate.