The bank balance is the balance a bank reports on the company’s bank account at the end of the month. And the book balance is the internal general ledger record of that mentioned account. But what is the difference between these two balances? Keep reading the article to learn more about the book balance, its importance, and examples.
Understanding Book Balance
Book balance is a business’s cash balance based on its records in accounting. The book balance may have records of financial transactions that aren’t yet processed by a bank account.
Book balance shows the fundings a business has after making adjustments for unprocessed checks, deposits in transit, or other transactions that have to be reconciled through the bank account.
Here are a few main facts about the book balance:
- Book balance often reflects unsettled financial transactions. These transactions will be settled through the bank account.
- A business’s book cash balance is reconciled with the bank balance thanks to a monthly bank statement at the end of an accounting period.
- Managing book balance can help small businesses to control a positive monthly cash flow.
A company uses the bank reconciliation process to compare its book balance amounts to the cash balance in the bank statement at the end of an accounting period. Note: the bank and book balances are rarely the same. Keep reading to learn more about the bank balance.
What Is a Bank Balance?
This term is used when making a bank statement. Another term for this concept is balance per bank statement. It reflects the ending balance on the bank statement at the end of each month.
Here’s an example. When a firm gets a checking account statement from its bank showing August’s financial activity, the end balance on August 31st is also the bank balance.
The Difference Between Book Balance And Bank Statement Balance
The bank balance is a business’s cash position in a business’s bank account, according to a report made at the end of the month based on bank statements.
When an accountant processes debits and credits through the bank accounts, those numbers are reflected in the bank account’s cash balance. But it doesn’t mean that book balance and a business’s bank balance are always identical.
Take a look at the table, which reflects situations when book cash balance and bank balance are different.
| Book Balance vs. Bank Statement Balance | |
|---|---|
| Book balance shows the cash balance a company records in their cash book. | Bank statement balance shows the cash balance that a bank records in their records. |
| Nature | |
| Book balance records some financial transactions that aren’t included in the bank balance. | Bank statement balance reveals transactions that are not recorded in the company’s book balance. |
| Transactions | |
| Book balance includes deposit in transit and outstanding checks. These records aren’t included in the bank balance. | Bank balance includes service charges, interest income, and NSF checks. These records aren’t included in the book balance. |
A Book Balance Example
Let’s all assume there is a company Sports Equipment selling training equipment. Sports Equipment writes a check with date April 21st to an ExampleCompany. The month-end bank statement won’t show the debit if ExampleCompany hasn’t deposited it before the end of April.
Eventually, the Sports Equipment’s bank balance would reflect those funds as if they still belong to the company when in reality, they don’t. As a result, Sports Equipment has to keep track of this pending transaction when managing cash flow. Otherwise, it could lead to cash flow problems.
