Balance: Overview, definition, and example
What is balance?
Balance refers to the state of financial equilibrium in which the total income, assets, or liabilities of an entity are equal to the total expenditures, debts, or obligations. In accounting and financial contexts, the term is often used to describe the equality between the debit and credit sides of a financial record or ledger. For individuals, businesses, and governments, maintaining a balance is key to ensuring financial stability and sustainability. A balance can also refer to the remaining amount of money in an account or the difference between the money owed and the money received or paid.
For example, a personal bank account balance reflects the amount of money currently available in the account after accounting for all deposits and withdrawals.
Why is balance important?
Balance is important because it ensures that resources are being properly managed and that there is no overspending, underfunding, or accumulation of unnecessary debt. For businesses, achieving a balanced financial statement helps them assess their profitability, liquidity, and solvency. In personal finance, a balanced budget ensures that expenses do not exceed income, helping individuals avoid debt and financial distress. Maintaining balance is also important in business management, ensuring that operations are funded appropriately and that the company remains financially healthy.
Understanding balance through an example
Let’s say a company has $500,000 in revenue and $300,000 in expenses for the year. The company’s financial balance would show that it has $200,000 left over, which can be used for reinvestment, savings, or paying dividends to shareholders. If the company's expenses were higher than its revenue, it would show an imbalance, indicating a potential financial problem that needs to be addressed.
In another example, an individual keeps a monthly budget where their income is $3,000, and their expenses are $2,500. The balance of $500 indicates that the person is living within their means and has extra funds that can be saved or used for discretionary spending.
An example of a balance clause
Here’s how a balance clause might appear in a financial agreement:
“The Borrower agrees to maintain a balanced operating budget, ensuring that the total expenditures do not exceed the agreed-upon revenue for the fiscal year. In the event that the balance of the operating budget is negative, the Borrower shall take corrective actions, including but not limited to reducing expenditures or securing additional financing.”
Conclusion
Balance is a critical concept in both personal and business finance, referring to the equal distribution of income, expenses, assets, and liabilities. Achieving balance helps ensure financial stability, enabling individuals and organizations to manage their resources efficiently and avoid financial difficulties. Whether in accounting, budgeting, or financial planning, balance is essential for maintaining long-term financial health and making sound financial decisions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.