Perhaps you'd rather learn accountancy instead. No problemo.
The amount of balance apparently on deposit in an account, even when figured with electronic accuracy, can be very misleading. An account with an average ledger balance of $1,500 theoretically can be overdrawn due to the existence of float, which is caused by the bank crediting the customer's account before deposited cash items have been collected from the banks on which they are drawn. Float is an analysis term used to describe the amount of uncollected funds in a ledger balance. Although all accounts have a certain amount of float, this factor is negligible in most personal accounts since there are few deposits and these deposits usually consists of one or two local checks. Float is most often encountered in business accounts. Consider the case of a small distributing company that markets products all over the United States, but buys these products in quantity locally. Assume that this company has an average daily balance of $1,500. In order to adjust this average daily balance to an average available balance, it is necessary to calculate the total amount of float on all the deposits made during the month, reduce this to an average daily float figure, and deduct this amount from the balance. This process may sound complicated, but it is really quite simple to do. Assume that nine deposits were made during the month, and the total dollar amount of all these deposits was $10,000. An examination of the locations on which the deposited items were drawn shows that it will take an average of one and a half days to collect the various items that were deposited in the customer's account.
1. Multiply the average time it took to collect the items by the total dollars deposited. One and a half days times $10,000 yields a total float for the month of $15,000.
2. Total float must be divided by the number of days in the month to obtain average daily float. Dividing $15,000 by 30 days results in a figure of $500, which represents the average daily float in this account.
3. The next step is to deduct the average daily float -- the uncollected portion of the balance -- from the average balance in order to obtain the amount that actually is on deposit and available for investing. In this case, $1,500 minus the $500 float shows an average collected balance of $1,000.
If, in the above example, the total deposits had amounted to $40,000, total float would have been $60,000, or an average float of $2,000 a day. Since the average balance is only $1,500, this account would theoretically be overdrawn $500, and the bank would be entitled to charge the customer interest on this overdraft rather than allowing him an earnings credit.
-- American Institute of Banking, PRINCIPLES OF BANK OPERATION (New York: Section The American Bankers Association, 1966).
