Accounting terminology: what is a balance?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In accounting, one of the most important and frequently used terms is "balance". Its significance is well known to those skilled in the art. People who are far from accounting know the word very superficially and, as a rule, they associate it with a certain difference. In a general sense, this is the difference that arises between the funds received and spent for a certain period. However, for an economist and accountant, the concept is much deeper and broader. What is a balance sheet and what is its significance for accounting for financial flows in an organization? This article will answer this question.

Origin and meaning of the term

The word itself came into our speech from the Italian language and literally translates as "remainder", "retribution" or "calculation". We learned about the balance in accounting in the nineteenth century. It was then that the word began to be used inas a term denoting the balance of funds on accounting accounts. Its meaning has not changed to this day. Although it has become more widely used in speech. If earlier it was used only in one case - to indicate the difference between the debit and credit of accounts, then since the beginning of the twentieth century its use has gone beyond accounting. Today, the word is also used in a figurative sense, present in the terminology of foreign trade relations.

Balance in accounting

Despite the widespread use of the term in modern speech, its main purpose remains unchanged. It is used by accountants when keeping records at the enterprise and reflects the difference between the amounts recorded in the debit and credit accounts. To disclose the concept, it is important to understand what a debit-credit is.

Balance can be formed on both sides of the account - left and right. The first is a debit and shows the income if the account is active, and the expense if it is passive. The second side - credit - has the opposite meaning. On each account, a difference is formed between them, called the "balance". If the debit is greater than the credit, then it is considered debit and is shown in the active part of the balance sheet. If less - credit (reflected in liabilities). Some accounts have both of them at the same time. In addition, the account balance may turn out to be zero, then they say that it is closed. In addition to debit and credit, there are other types of balances. Consider them further.

Types of balances in accounting

In accounting practice, there are several types of balances, namely:

• debit and credit;
• active and passive;
• beginning and ending.

We have already considered the first two types. As for the surplus, it occurs when the funds received by the organization exceed the costs incurred by it. In the opposite situation, when revenues are less than actual costs, a passive balance is formed. Despite the fact that the difference can be both positive and negative, it is always written with a plus sign. This is due to the fact that when accounting for economic assets, the principle of double entry is used: on the one hand, those operations that led to an increase in material assets are taken into account, on the other, to a decrease.

Now let's figure out what the opening and closing balances are. The fact is that the analysis of operations in accounting is carried out for a certain period (for example, for a month). At the end of it, the account is closed, and the debit and credit indicators are considered, the difference of which is transferred to the next month. The balance at the beginning of the period, calculated on the basis of previous transactions, is called the opening balance. It is easy to guess what a final balance is. This is the account balance at the end of the period. It is defined as the sum of the incoming balance and turnover for the period under review.

Calculation example

To better understand what a balance is, let's look at a simplean example of its calculation. Let's take the "Materials" account. At the beginning of the month, it had 1,000 meters of fabric (initial balance). During the billing period, another 200 meters were purchased and 600 were sold. At the end of the month, the results of operations on this account were summed up. The final balance was: 1000 + 200 - 600=600 meters. Since this account is active, the debit exceeds the credit, it will be debit.

Suppose that in the same month you have formed a debt for fabric in the amount of 5 thousand rubles. For accounting, we use the passive account "Settlements with suppliers". You gave him 4,000 and received 2,000 from him on the invoice. At the end of the month, the accountant calculated the balance: 5 - 4 + 2=3 thousand rubles. Since the account is passive, the balance will be credit.

Foreign Trade Relations

This area of the economy also uses the Italian word for difference. What is the balance in international trade? At least two of its varieties are distinguished here - this is the balance of trade and the balance of payments. Let's analyze what these concepts mean.

Trade balance

The basis of foreign trade is export and import. The difference between these values for a certain period is called the trade balance. It can be either positive (when exports exceed imports, that is, the country sells more than it buys) or negative (when the trend is reversed). All over the world, the situation of excess of imports over exports (negative trade balance) is considered asnegative. The explanation is simple: as a result of such a policy, the country is flooded with foreign goods, which is why the domestic producer suffers, and the money "leaks" abroad. The recommendations of the International Monetary Fund even contain special indications of the need to maintain a positive trade balance, and this provision is often one of the mandatory conditions for issuing loans to states. However, in America, for example, the situation is reversed. Over the past few years, this country has been dominated by imports of goods, and the negative balance reaches tens of billions of dollars. At the same time, the living conditions of the US population can be envied by residents of many countries that only strive for such well-being.

Balance of payments

There are always monetary settlements in relations between states. The difference between receipts from abroad and payments to other countries is called the balance of payments. It is positive if more people enter than leave, and negative if the situation is the opposite. In the latter case, there is a decrease in the country's foreign exchange reserves (if payments are made in a currency, for example, euros or dollars). To fill the gap, it becomes necessary to sell domestic goods for foreign currency. You can also replenish your account with stabilization loans.

Balance in utility bills

Since the beginning of 2012 receipts have become more detailed. On the one hand, this is a positive trend, but on the other hand, citizensthere are many questions about its content. For example, many are interested in what is the balance in the receipt. This column shows the personal account balance at the beginning of the current month. If the value is positive, then there is an overpayment for housing and communal services, if it is negative, then there is a debt. At the same time, it is considered as such only after the 10th day of the month following the settlement month (it is during this time that residents are required to pay utility bills). Thus, ordinary citizens are faced with the concept of "balance" in everyday life. In this case, it is treated as an incoming balance on the personal account of their living quarters.

Conclusion

In the article, we examined in detail the question of what a balance is, how it happens and in what areas it is used. This concept is most widely used in accounting when analyzing operations for the receipt and expenditure of funds in an organization. However, it is also applied in other areas, including foreign trade and even housing and communal services.