Definition: An account balance is the difference between the debits and credits posted to the account during the current accounting period plus the beginning balance. Not all accounts maintain balances from one accounting period to the next. Temporary accounts are closed at the end of each accounting cycle to permanent accounts, which carry the balances on to the next accounting period.
All accounts have either a debit or credit balance. Keep in mind that this does not mean a positive or negative balance. Instead, a debit refers to entries in a t-account on the left side while a credit is an entry on the right side.
What Does Account Balance Mean?
Asset accounts have debit balances while liability and equity accounts have credit balances. There are a few exceptions to this rule, however. Contra accounts have a balance opposite from their classification. In other words, a contra asset account actually has a credit balance and a contra equity account has a debit balance. These contra accounts reduce their associated category level.
Account balances are calculated by starting with the beginning balance. The debits are totaled, the credits are totaled, and all three are combined together. This is the ending account balance.
Example
It’s easiest to see the calculation with a t-account. Let’s look at the cash t-account for example. This account has a beginning debit balance of $3,000. During the accounting period, the company used $1,000 to purchase a vehicle. The $1,000 purchase is recorded as a credit and reduces the overall cash balance.
The ending balance in the cash account equals a debit of $2,000 (the beginning $3,000 minus the $1,000 credit). As you can see, the difference between the debits and credits including the beginning balance equals the account balance.
Temporary accounts like income and expenses accounts don’t have beginning balances, so their ending balance is just the difference between the debits and credits of the current period.
