closing balance – the amount of money available to a business (usually in your bank account) at the end of the month (or quarter or year)
To remember what closing balance means use the following mnemonic:
After closing the business at the end of the year, I checked the bank balance (closing balance). The amount that remained in the account wasn't much.
In business, a closing balance is the amount of money left in a bank account at the end of an accounting period. This is usually a financial quarter or year, but could also be a month. Some managing directors check how much was in the bank at the close of the day (midnight) every day.
The closing balance can be calculated without looking at your actual bank account. By finding the amount of money in the bank account at the start of a period, adding up all the money that went into the bank, and then subtracting all the money that got paid out of the bank, you can work out the closing balance.
Closing balance = Opening balance + Sales – Purchases + Expenses
The closing balance is very important for a business to monitor because if the closing balance keeps on falling at the end of every month you can be certain that the company is spending too much money and something needs to change. For example, money needs to stop being spent on improvement or investments and the company must wait for the money from profits to catch up.
Here is a simple example of how to calculate a closing balance:
Let’s say that you have a business bank account with a balance of £10,000 on January 1st. During the month of January, you make 5 sales of £100 each and 2 purchases of £50 each. You also pay your employees £2000 in wages. The closing balance for January would be calculated as follows:
Closing balance = Opening balance + sales – purchases + expenses
£10,000 + 5 x £100 – 2 x £50 – £2000
= £10,000 + £500 – £100 – £2000
The closing balance of £8400 would then be the opening balance for February.