Eli5 What does it mean to ‘balance the books’?
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Balancing the books is a basic part of maintaining finances…for a business or personal. The “books” are where transactions are recorded. Balancing the books is comparing what you think your account balance is with what another resource (like a bank or even a vendor) says your balance is.
People used to always have a physical checkbook for paying bills. You’d keep track of your payments and deposits in the checkbook. Once a month, you’d get a statement from your bank. The statement would list all of the transactions the bank processed for a specific period of time. You’d mark the transactions as ‘cleared’ if the bank has the same information you have.
For example….check number 347 was written to CVS for $22.53 on March 1. When you get your statement, you see thst the bank has paid that check to CVS, it has cleared your account.
On March 27, you wrote a check to your niece for $75 for her bday. She hasn’t cashed the check yet. Therefore, the balance the bank is showing is $75 more than the balance you’re showing for the account.
Knowing which transactions are outstanding (the check to your niece) help you have a better understanding of your balance…and keeps you from becoming overdrawn.
Most all of this is done electronically these days.
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