If you’ve been running your own business for a while, you’re probably familiar with terms like opening and closing balance. But if you’ve just started a new business, or you’re delving into accounting for the first time, it might be the first time you’ve come across these terms.
With that in mind, here’s everything you need to know about your closing balance – including what it is, how to calculate it, and why it matters for your business.
What is a closing balance?
The definition of closing balance is the amount left in an account at the end of a certain timeframe. It’s both an accounting term and a banking term, and businesses use closing balance as an indicator of whether the company’s costs have exceeded its revenue during a reporting period.
It’s worth noting that there’s a couple of key differences in the meaning of closing balances for banking and closing balances for accounting. Here’s a closer look at what that means:
Closing balance meaning in banking
In banking, the definition of closing balance is really simple: it’s the positive or negative bank balance at the end of a certain period, whether that’s a day, month or year. Because of this, it’s also easy to calculate – all you need to do is check your bank statement. You can usually find your closing balance listed at the top of your bank statements, letting you know how much money you have available.
One of the reasons this closing balance might be different to a closing balance in accounting has to do with outstanding transactions. Although your bank closing balance might not account for any outstanding transactions, these transactions would be included in your accounting closing balance.
Closing balance meaning in accounting
In accounting, a closing balance refers to the amount of money available to your business at the end of a specific accounting period. The accounting period depends on how your company tracks its finances, but it might be a day, a week, a month, a quarter, or a year.
Unlike personal banking, a closing balance in accounting is only calculated when all your transactions for that period are recorded. Once every transaction has been recorded, the closing balance is calculated by working out the difference between your company’s credits and debits. Whatever the difference is, whether it’s a positive or a negative amount, that’s your business’ closing balance.
Your closing balance is then carried over into the next accounting period, where it becomes your opening balance. In your accounting statements, this balance might be referred to by ‘c/f’ (carried forward).
How to calculate your closing balance
In order to learn how to calculate closing balance, you’ll need to work this out using the below formula.
Formula for closing balance
The closing balance formula/equation is:
Net cash flow + opening balance
If you use an accounting software, your closing and opening balance will be automatically calculated for you. But if you’re doing the accounts yourself, Luckily, it’s still really straightforward.
How to work out closing balance
To work out your closing balance, you’ll need:
- Your opening balance from the start of this accounting period.
- Your earnings from this accounting period (this is your debit). Earnings might include things like sales, debtors and loans.
- Your outgoings from this accounting period (this is your credit). Outgoings might include salaries, creditors and expenses, such as subscription fees, office costs, etc.
Once you’ve got those figures ready, all you need to do is:
- Add together your opening balance and your earnings,
- then subtract your outgoings.
- So, if you started an accounting period with an opening balance of £15,000, and you earned £20,000 in that period while spending £10,000, your closing balance formula is: £15,000 + £20,000 – £10,000 = £25,000.
The difference between what you earned (your debit) and what you spent (your credit) in an accounting period is what’s known as your net cash flow. So, another way of working out your company’s closing balance is simply by adding your net cash flow to your opening balance. Easy!
Why are closing balances important?
Whether you’re a small startup or an established brand, closing balances are incredibly important for any business. Although other metrics are also important, your closing balance gives you an easy way to see how your business is performing. For example, if you have a negative closing balance at the end of your accounting period, you might be spending too much or not earning enough.
You can also compare this balance to closing balances from previous accounting periods, allowing you to identify trends and see whether your balances are increasing over time. By regularly checking these balances, you’ll be able to keep your business on the right track.
However, for your closing balance figure to be of any use, it needs to be accurate. That’s why it’s important to keep track of every single transaction your company makes, whether that’s incoming or outgoing. You can do this manually through a cash book or spreadsheet, but most growing businesses automate the process through their accounting software. Having an accurate closing balance is also important for things like reconciliation.
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