Balance is an accounting term that denotes the difference between the receipt of funds and their expenditure for a certain period. Term balance can be applied not only in the field of corporate finance, but, for example, also in relation to international trade.
Balance and credit
In accounting, the balance is understood as the difference between the total amounts of all debit and credit entries of the enterprise budget. The balance is calculated monthly on the first day:
- If the debit amount is higher than the credit amount, the balance is considered debit and reflects the amount of available cash at the company.
- If credit prevails over debit, the balance credit– it characterizes the state of sources of economic funds.
A situation is rarely possible when the budget debit and credit are equal - in in this case talk about closed balance.
This classification of the balance sheet is not the only one. There are also:
- Active and passive balance. A surplus balance is considered when the funds received into the account exceed the amount debited from it. On the contrary, if income is less than expenses, they speak of a passive balance. Although the difference can be either positive or negative, in any case the result is recorded with a plus sign. This is due to the use of the principle double entry.
- Opening and closing balance. The accountant produces for a certain period. The budget balance at the beginning of the analyzed period, formed from previous operations, is called incoming balance. As a result of the analysis of the movement of funds for the period, a final balance.
"Balance" is a concept in the economic sphere, which means the difference in the balance of funds between receipts in the account and their expenditure over a certain period of time. The use of the concept of “balance” is very extensive in the economic sphere, but it is most widespread in the specifics of accounting.
Accounting balance
In accounting, the concept of “balance” is inextricably linked with the concepts of “debit” and “credit,” and the balance itself is calculated as the balance of funds in a specific accounting account: it is necessary to subtract the credit from the debit. That is, subtract the amount of expenses from the amount of income.
Debit and credit
The amounts of funds in a particular account form the overall balance, which is subject to various changes, primarily multiplication and spending. If the situation is clear regarding specific receipts and a positive balance, then how does the debit relate to the amounts of future interest and estimated (expected) profits? These amounts are also taken into account in the debit picture as the amount of possible receipts.
The credit amount can grow in parallel with the debit amount. To understand this fact, it is enough to give a simple example: let’s say an enterprise purchases specific equipment - machine tools. The amount was spent on equipment, but it also requires repairs, purchase of spare parts, staff training - that is, additional expenses that are credited. Profit from the use of equipment grows along with the loan for its maintenance.
There is a requirement in corporate rules that the balance is calculated every month (sometimes on a ten-day basis) with the balance being transferred to the beginning of a new period.
It should also be noted that accounting is associated with the terms liability and asset, that is, these are two special registers where the balance of funds is entered depending on the type of balance.
Active account:
- Debit means only profit in the form of assets, cash and other valuables. It can also mean the amount of debts of subsidiaries to the parent company.
- A loan means only the expenditure of funds for needs regulated by accounting.
Passive account – an account that takes into account the amount of funds expected receipts, interest, tax deductions, obligations, etc.
Passive account:
- Debit is associated with a decrease in the amount of income, a decrease in profitable funds, and an increase in costly ones.
- The loan is associated with the amount of interest payments; as a rule, this balance is always positive.
Types of balances for accounting
The difference between debit and credit (receipt/expense) is divided into the following types of balance:
Debit balance relevant in case of excess of debit over credit - this information characterizes the account for a specific period and means that the account balance is positive. Such a balance is considered normal; it is recorded as an asset.
Credit balance relevant if waste exceeds the total amount of profits on a specific account. This information is entered into liability.
Closed balance occurs when there is no account balance left at all, that is, all profits are wasted. Waste may be associated with all sorts of financial activities under accounting regulations.
Sometimes a unique case occurs in which a particular account may have two balances of debit and credit type at the same time. This situation arises according to the following scheme: funds are transferred to a specific account, and the balance begins to grow, but at this very time there is a loan on the account to pay for specific services with write-off at the end of the month. In fact, there are funds on the balance sheet, but they are already provided for the repayment of loans or advances.
When analyzing any accounting report, the last reporting period and all data for a specific month (decade) are always of particular importance. However, any audit will take into account the following data related to the balance of a particular account:
Incoming balance– this is the sum of all funds that were deposited during the entire reporting period.
Periodic balance– this is the sum of all funds that were deposited during the allocated period in the reporting period. That is, if the reporting period lasts 1 calendar month, then the amount of the periodic difference can be calculated, for example, for 12 days.
Debit and credit turnover– turnover of funds, which is calculated as the sum of income and expenses for a specific period or for the entire reporting period of a specific financial activity.
Outgoing difference (remaining) can be calculated as the difference between the debit balance and the entire amount of expenses plus the calculation of additional costs, which include various penalties, taxes, etc. If the balance goes into the negative, then credit interest is added to the expenses.
Accounting for the common man is something difficult to understand. However, many of us often hear and even use two terms in colloquial speech: debit and credit. But not everyone knows what debit and what credit are, or, more precisely, what these two words actually mean. It is worth understanding what debit and credit are in simple language, understandable to those who are far from accounting.
Definition
Any commercial enterprise cannot exist without accounting, because its main task is to generate income from its activities. To calculate net profit, you need to subtract expenses from total income. In the language of an accountant, debit is income, credit is expense in active accounts, and vice versa in passive accounts.
You can explain in simple language what debit is and what credit is as follows: debit is the profit from the activities of the enterprise, sales of goods or services, credit is the cost of raw materials, materials, salaries, etc.
It's hard to imagine modern enterprise without accounting, its maintenance is mandatory for all entrepreneurs - this requirement is regulated at the legislative level. Debit and credit are the basis of accounting; these two terms originated more than 500 years ago and were first mentioned in the book of an Italian entrepreneur, “Treatise on Accounts and Records.” By the way, translated from Latin “debit” means I owe, “credit” means I owe.
How to understand accounting accounts
To clearly understand what debit and credit are, you need to consider how they are reflected in accounting entries. An accounting account is a table with two columns, with right side the income of funds is displayed, on the left - the expense. Alternatively, the accounting method used to determine cash flow is called double entry.
To more clearly understand these two definitions, consider the principle of accounting using the double entry method. Any business transaction at the enterprise must be recorded in the accounting report, and all transactions are displayed in both columns simultaneously.
Definition of debit and credit
In simple words, what is the essence of double entry? So, any business transaction must be entered in the form of a record. If we say that debit, credit in simple words- these are two columns in the journal, then an entry for each transaction is made in both.
The company received raw materials for production. Its cost is 10,000 rubles - this is a business transaction, which is entered as a double entry on the credit - “60 settlements with suppliers” and on the debit “10 Materials”.
From this example, it can be seen that the company’s receivables to the supplier have increased for the goods supplied, which is displayed in the left column. But the company has replenished its warehouse with raw materials, and this is also its property, so the entry is displayed in the right column as a receipt.
Differences
A loan in accounting is a decrease in assets, that is, that group of accounts that is owned by the organization. It includes all property, including real estate, all material assets and cash. Debit, on the contrary, is an increase in an asset, profit and income, and it does not matter what it is expressed in material profit, in the form of equipment, real estate, raw materials, or in monetary terms. This is the first and main difference between the two concepts.
In passive accounts, a credit is reflected as an increase in the company's debt obligations, and a debit is a decrease in them. And on passive accounts, records are kept of the sources of formation of economic funds. In simple words, this is wages employees of the enterprise, authorized and reserve capital, taxes and fees.
Example of double entry accounting
What is balance
The main task of accounting is to derive the balance between income and expenses in order to identify the net income from the activities of the enterprise. In simple terms, this is the difference between the amounts of entries, that is, debit minus credit.
Balance is the difference between income and expenses over a certain period of time.
In accounting, if income is greater than expenses, then it is displayed on the active account as a debit balance. And if, on the contrary, expenses exceeded profits, then the passive account is treated as a credit balance.
This is exactly how the total assessment of monetary transactions in an enterprise is carried out over a certain period of time. Here it is not difficult to understand that the enterprise becomes profitable at the moment when the debits on the active accounts exceed the credits. By the way, the profitability or unprofitability of an enterprise is calculated at the end of the year; intermediate values are not taken into account.
So, clearly understanding what debit and credit are in accounting is not so difficult. These, in simple and understandable language, are income and expenses, precisely those indicators that allow you to evaluate and calculate the net profit from the activities of companies.
IN Italian balance- this is a calculation or remainder. This term refers to the difference between total cash receipts and total cash expenditures in a particular time period. If we talk about the positioning of this term in accounting, then this will be the name for the difference in the total amounts of credit and debit turnover.
Types of balances
The balance can be beginning or ending. In this case, the debit balance is positive, and the credit balance is negative.
To determine the ending balance, it is added to the credit or debit turnover. If we take into account international trade and payment settlements, then the balance will be understood as the difference in the total amounts between imports and exports, as well as between receipts of financial resources in a particular country and payments abroad.
Debit and credit balance
If the debit is greater than the credit, then we are talking about a debit balance. It is capable of reflecting the state of affairs of a particular type of economic means in a specific time period. The debit balance is shown in the asset balance.
In the credit balance, the credit will be slightly greater than the debit. It can reflect the state of different sources of economic funds. In this case, the credit balance is shown not in the asset, but in the liability of the balance sheet.
Provided that the account has no balance, the balance indicator will be equivalent to zero. This account will be closed. In practice accounting There have been cases where accounts have both a credit and a debit balance.
If we take into account the practical part of the analysis of accounting, then not its entire history is studied, but only the time period of interest. In this context, the following types of balances can be distinguished:
- opening balance;
- debit turnover for the period;
- credit turnover for the period;
- balance for the period;
- opening balance.
Initial or opening balance shows the account balance at the start of the transaction. The basis for the calculation is the operations that were carried out previously.
Final or opening balance determines the account balance at the end of the specified period. Most often, the final result of the calculation is the arithmetic sum of the opening balance and turnover for the entire period.
Basis for calculation debit and credit turnover are operations carried out in a certain time period.
Balance for the period is the result of operations at a specific time.
Foreign trade relations
If we talk about foreign trade relations, then quite often we consider the amount of exports and imports for a specified time period. The resulting difference between the total value of imports and exports is called the trade balance. In this case, the balance can be negative or positive.
- In the first case, there is an excess of imports over exports.
- A positive balance will determine the excess of exports over imports, which essentially means a situation in which the country sells more goods rather than buys them.
There is also a concept called balance of payments. This is the name of the difference between foreign receipts and payments outside a particular country. The balance of payments can also have a positive or negative value.
- In the first case, the excess of all payments that come into the country from abroad over payments that are made by this country is determined.
- When the balance of payments is negative, there is an excess of payments made over receipts.
International payments are most often made in the most convertible currency.
In accounting, just like in mathematics, accuracy plays a big role. There can be no conventions here. At the same time, many experts call balance one of the most significant terms. We propose to find out what a balance is, whether there is a balance in the economy, and what is commonly understood as a trade balance.
What is a balance in accounting?
Back in the 19th century it was known what a balance was. In those days, the word began to be used as a term calling the balance of funds on all accounts. The meaning remains unchanged today. However, it has now acquired a wider meaning. Previously, it was customary to use it exclusively to indicate the difference between the debit and credit of accounts. Since the 20th century, the use of the term has been able to extend beyond accounting.
This term in accounting is one of the most significant terms. Experts in this field are very well aware of its importance. The balance of payments is the difference that arises between funds spent and funds received over a certain time. For specialists, this concept is broader. The balance is divided as follows:
- debit;
- credit;
- for the period;
- outgoing;
- incoming.
What is an opening balance?
In accounting, it is important to know not only what the term balance itself means, but also what is commonly understood by such terms as incoming and outgoing balance. There is a significant difference between the opening and closing balances, which every accounting professional should definitely see. The closing balance, or, as it is often called, the closing balance, is the account balance at the end of the period. It is usually calculated as the sum of the opening balance and all turnover for the period.
What is an opening balance?
In accounting and economics, accuracy and understanding of basic processes are very important. Any mistake can be fatal. For this reason, accounting professionals must clearly understand what a balance is and what it can look like. The concept of balance is usually divided into incoming and outgoing. The first is understood as what arose during the analysis of account movements for the last analyzed period and at the beginning of a certain period.
Active and passive trade balance
Beginners in accounting and economics often wonder what a balance is and what an active and passive balance is. The first refers to the excess of exports over imports. As for the passive balance, this term refers to the excess of imports over exports. You can often hear about the net balance, which is a situation where exports and imports are equal.
Balance of payments surplus
Accountants call the balance of payments a certain result, which is reflected in the final line of a certain balance sheet of the country, which is presented in the form of a reminder balance sheet document. It shows both the revenue and expenditure transactions of the government. The balance of payments is divided into active (positive) and passive (negative). The active balance is the balance between the current transactions account and the balance of the funds flow account.
Passive balance of the balance of payments
A negative or, as it is often called, a passive balance does not always indicate a crisis in the state’s balance of payments, since it can often be covered through the movement of entrepreneurial capital. This can be when the country has a normal investment climate for both foreign and domestic entrepreneurs. We can say that a crisis exists if a significant negative balance is regularly covered by foreign exchange and gold reserves.
How to calculate balance?
Not only accountants, but sometimes even ordinary citizens need to understand how to correctly find out the value of the balance. An example of such a situation where it is important to know about its indicator may be the need to calculate in a receipt for public utilities. Accuracy and certain knowledge are important here. However, not every novice accounting specialist knows how to calculate the balance. It is important to know the main points:
- To calculate this value by material resources it is necessary to add up all the money received for a certain time and expenses for a given period. In this case, you need to calculate the difference between 2 numbers, which will be the balance.
- There are formulas with which you can calculate the balance of passive and active accounts:
- by debit = initial balance + debit turnover – credit turnover;
- by credit = initial balance + credit turnover – debit turnover. This difference is considered very convenient when drawing up reconciliation reports.
What is a balance on a receipt?
Not only specialists, but also ordinary people should know about some aspects in accounting. Sometimes even when paying for utilities, a lot of questions and misunderstandings arise, since it is difficult to understand accounting terms. One of them is considered to be the balance. For some it is a clear and simple term, but for others it has a new meaning. To modern man It is important to understand what a balance is in a housing and communal services receipt.
This value can show the balance personal account at the beginning of this month. And when the value is positive, this indicates an overpayment for utilities. When the number is negative, there are definitely debts. Moreover, it is usually considered to be such after the tenth day of the month following the settlement month. We can say that the balance is considered as an opening balance on the personal account of the residential premises.
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