Calculating Bank Account Balance After Credits

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Calculating Bank Account Balance After Credits

What’s a General Ledger?

Imagine you have a large book where you record all the money your business earns and spends. That’s similar to a general ledger. It records all the company accounts and their transactions.

Balancing the Books

To balance the ledger, you need to do some simple math. You remove the total number of debits from the total number of credits. However, first, you need to understand some essential rules regarding credits and debits.

How to Figure Out the Balances?

Here’s what you do:

  1. Write all debit accounts on the left side of a sheet.
  2. Write all credit accounts on the right side.
  3. Place the balance for each account next to its corresponding account.
  4. Look at each transaction involving money. Consider which account it affects and whether it increases or decreases its value.
  5. Add up the new balance for each account.
  6. Update your sheet with the new balances.

When you’re done, verify that credits and debits match. This means your books are balanced.

Important Rules to Remember

  1. Debits must equal credits in the end.
  2. Debits increase the balances of asset, expense, and dividend accounts.
  3. Credits increase liability, revenue, and equity accounts.

It might help to remember some funny words to keep track:

  • D.E.A.D.: Debits increase Expenses, Assets, and Dividends
  • G.I.R.L.S.: Credits increase Gains, Income, Revenues, Liabilities, and Stockholders’ equity

What’s the Difference Between Credit and Debit?

In business money talk, credits and debits are two types of accounts. A credit is money “owed,” and a debit is money “due.” It’s like two sides of the same coin.

Credit Cards vs. Debit Cards

You might have heard of credit cards and debit cards. They’re both cards you can use to buy things instead of cash. But they work differently:

  • A debit card uses money you already have in your bank account.
  • A credit card is essentially a form of borrowing money. You have to pay it back later.

Closing Balance: What’s Left at the End?

Now, let’s discuss a closing balance. It’s the money remaining in an account at the end of a specified period, such as a day or a month.

Closing Balance in Banking

In banking, the closing balance is simple. It’s how much money is in your account at the end of the day or month. You can see this on your bank statement.

Closing Balance in Business

In business, it’s a bit different. The closing balance represents the amount of money a company has at the end of a specific period. To figure it out, you look at the difference between credits and debits in the general ledger.

How to Figure Out the Closing Balance?

Here’s a simple way to do it:

  1. Start with the amount of money you had initially (opening balance).
  2. Add all the money you got (earnings).
  3. Take away all the money you spent.

The answer is your closing balance!

Here’s an example:

  • You start with $10,000
  • You earn $17,000
  • You spend $13,000
  • Your closing balance is: 10,000 + 17,000 – 13,000 = $14,000

Why Is the Closing Balance Important?

The closing balance is super important for businesses. It indicates whether a company is performing well or needs to make changes. If the closing balance is negative (less than zero), the company spent more than it earned. That’s not good!

Businesses can ensure they’re on the right track by regularly checking their closing balance. It’s like a report card for the business’s money.

Keeping Track of Money

Businesses need to track every single time they receive or spend money. This helps them know exactly where their money is going. Some companies use a remarkable book called a cash book to do this, while others use computer programs to keep track.

Closing Thoughts

Understanding how businesses manage money might seem difficult at first. However, it’s simply about keeping good records and performing some basic math.

Here are the main things to remember:

  1. A general ledger is like a big book of all the money coming in and going out.
  2. Credits and debits are two sides of the same coin in business money talk.
  3. The closing balance indicates the amount of money remaining at the end of a specific period.
  4. Keeping track of every penny helps businesses know if they’re doing well or need to make changes.

By understanding these concepts, you can see how businesses utilize their resources wisely. And who knows? Maybe one day you’ll use these ideas to run your business!