What is a closing balance, and how to calculate it?
What happens if you end a financial or reporting period with a negative closing balance — are you spending too much or not earning enough?
Calculating your closing balance provides an easy way to see how your business is actually performing.
This article at a glance
Closing balances may seem simple on paper but they may require more effort to calculate, depending on whether you’re calculating a banking closing balance or an accounting one. Read on to find out more about what a closing balance is, and how to calculate it and apply it to your accounting and/or banking processes.
What is a closing balance?
Your closing balance is how much money remains in your account at the end of an accounting period. The closing balance will be what’s remaining in your account after you have recorded all your sales numbers, made your required payments, and paid off all your expenses.
Depending on your business, your accounting period may be a day, a month, a quarter, or a year. No matter how long your accounting period is, your closing balance must be brought forward to the next accounting period as an opening balance.
For permanent accounts, this closing balance will be carried forward as your opening balance for the next accounting period.
For temporary accounts, the closing balance is rolled into retained profits at the end of the financial year. Following this, your temporary account balance is reset to zero.
For some countries or organisations, you may see the abbreviations c/d or c/f. This refers to ‘carried down' and ‘carried forward' - this refers to the closing balance.
Why is closing balance important?
Closing balances are important because they show how a business is performing. A positive closing balance shows that your business is on track. A negative closing balance may mean you’re spending too much or not earning enough, which might affect your business’s cash flow.
Identifying trends through comparing closing balances is also crucial to ensure that your business is on the right track. Tracking the closing balance at the end of each reporting period can tell you if your balance is increasing, stagnant, or decreasing.
However, your closing balance must be accurate. To do this, keep track of every small or big transaction, incoming or outgoing. Accounting software will be your best bet, but if you prefer to keep track manually, you can use a cash book or simply an excel spreadsheet.
Closing vs opening balance
As the name suggests, an opening balance is very different from a closing balance. To put it simply, the opening balance of your account is how much money — negative or positive — you have at the start of the accounting period.
The opening balance for a new accounting period is usually brought forward from the last accounting period’s closing balance.
|Month||Amount of money in account|
|30 December 2021 (closing balance)||€ 100,000|
|1 January 2022 (opening balance)||€ 100,000 (brought forward from the closing balance of the previous accounting period)|
While closing balances can help you track your expenses, opening balances are also important too. It’s the opening balance that ensures your accounting numbers are always accurate and assists you in maintaining a consistent financial record.
Sometimes, you might notice the abbreviations b/d or b/f. This means ‘brought down' and ‘brought forward', which refers to the opening balance.
How to calculate a closing balance?
If you’re using accounting software, you can just skip this section. But if you’re using manual calculation, doing the accounts yourself, or simply performing a check on the closing balance, you need this formula to work out the numbers.
Don’t worry — it’s straightforward.
The formula for the closing balance
Imagine your accounting period is from 1 October to 30 October.
Here’s what you need to prepare before starting:
- Your opening balance from the start of the accounting period (1 October)
- Your earnings such as sales, debtors, loans, etc. from this accounting period (1 October to 30 October)
- Your outgoings such as salaries, creditors, expenses, etc. from this accounting period (1 October to 30 October)
Now, you’re ready to start calculating.
Closing balance = Opening balance + earnings — outgoings
Closing balance example
Company ABC started the accounting period with £200,000 in its business account. The company made sales adding up to £150,000 between 1 October to 30 October, both dates inclusive. They spent £50,000 during the same period.
How much is the closing balance for Company ABC during the accounting period of 1 October to 30 October?
Opening balance + earnings — outgoings = Closing balance
£200,000 + £150,000 — £50,000 = £300,000
Accounting closing balance vs banking closing balance
The term closing balance is often used in both accounting and banking. Here’s the difference between the two.
Closing balance in accounting
Accounting closing balance is how much money is left in your account at the end of the accounting period.
Unlike a banking closing balance, an accounting closing balance is only calculated when all your transactions have been recorded, including earnings and outgoings, and other miscellaneous fees.
The accounting closing balance is the difference between your company’s credits and debits. This may work out to either a positive or negative amount.
Closing balance in banking
A banking closing balance is the positive or negative amount you see in your bank balance at the end of a certain or specified period. As such, it’s much easier to know your closing balance in banking.
It’s usually listed at the top of your bank statement as to how much is left in your account. You may not even need to calculate to know your banking closing balance.
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