DEFINITION of Average Collected Balance

The average collected balance is the average balance of collected funds (less any uncleared or uncollected deposits) in a bank account over a specified period, usually one month. The average collected balance is calculated by summing all of the daily collected balances in the period and dividing by the number of days in the period.

BREAKING DOWN Average Collected Balance

The average collected balance is used to determine the amount of interest to be paid on a monthly balance, since uncollected funds do not earn interest. For most individuals, the difference between the average daily balance and average collected balance will be small, but for businesses or enterprises it may be very large.

Average Collected Balance and Types of Customer Accounts

Commercial banks pay interest on customer deposits. Many forms of deposit accounts exist, including checking accounts, savings accounts, call deposit accounts, money market accounts and certificates of deposit (CDs).

Checking accounts allow both withdrawals and deposits (and are also called demand accounts or transactional accounts). Savings accounts are also deposit accounts that provide a modest interest rate. Banks or financial institutions may limit the number of withdrawals a customer may make from a savings account each month; the institution may also charge fees if the customer does not maintain a certain average monthly balance. In most cases, banks do not provide checks with savings accounts.

Call deposit accounts offer the advantages of both a savings and a checking account, while money market accounts may be types of mutual funds, which offer baskets of money market instruments. CDs are a savings certificate with a fixed maturity date and specified fixed interest rate.

Average Collected Balance and Interest Income

Interest due to the owners of certain deposit accounts are liabilities to the bank. The average collected balance represents the full amount for which the bank must pay interest (excluding any uncollected funds).

Commercial banks earn revenue, based on the amount they hold in collected balances. With these funds they are able to provide loans, including mortgages, auto loans, business loans and personal loans. (A commercial bank may specialize in just one or a few types of loans.) The interest rate the bank pays on these funds that they borrow is less than the rate charged on money they lend. This spread equals the net interest income, or profit, that a commercial bank earns.