Adjusted Balance Method – Definition

Cite this article as:"Adjusted Balance Method – Definition," in The Business Professor, updated September 18, 2019, last accessed June 2, 2020, https://thebusinessprofessor.com/lesson/adjusted-balance-method-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

Adjusted Balance Method Definition

The adjusted balance method is a method used in accounting in order to assess finance charges on the amount that an individual/company owes until the end of billing period once all credits and payments are recorded.

A Little More on What is Adjusted Balance Method

Most of the financial institutions including banks use adjusted balance method for assessing the amount of interest that savings account holders and credit card users owe. In case of savings account, interest is ascertained every month after posting all debit and credit transactions. Considering credit cards, finance charges are calculated using a grace period as anything bought or purchased between the last month statement and the end of the existing billing period, cannot fit in the adjusted balance of the account holder.

Example of the Adjusted Balance Method

With this example, the working of adjusted balance method will be clearer:

For instance, you have a credit card balance of $10,000 at the end of the last billing period of your card. In the next billing cycle, you pay $1200, along with getting a credit for a return worth $200. Let’s assume that these were the only two credit card-based transactions you made in that period. Considering it, the adjusted balance for ascertaining finance charges would be $8600 ($10,000 – $1200 – $200), and not the whole $10,000.

Advantages of Adjusted Balance Method

Adjusted balance method offers lesser interest costs to its customers. As finance charges are ascertained at the end of billing cycle on ending balances, it leads to lesser interest rates as compared to other methods including average daily balance or previous balance method. However, credit card issuers find average daily balance method and previous balance method more reliable for identifying credit card balances than adjusted balance method. The reason being they don’t consider payments, credits and recent purchases made in the current billing cycle in order to assess finance charges.

Truth-In-Lending-Act asks credit card issuers to inform their customers about the method they’ll be using for assessing finance charges, interest rates per annum, fees, etc. in their ‘terms and conditions’ page. Besides credit cards and savings accounts, adjusted balance method is also widely used to calculate fee for different types of debt such as home equity lines of credit.

Reference for “Adjusted Balance Method”

https://www.investopedia.com/terms/a/adjustedbalancemethod.asp

https://www.accountingtools.com/articles/what-is-the-adjusted-balance-method.html

https://www.thebalance.com › … › Credit Card Basics › Finance Charges

https://investinganswers.com/financial-dictionary/…/adjusted-balance-method-1382

www.investorwords.com/107/adjusted_balance_method.html

Academics research on “Adjusted Balance Method”

Consumer Credit-Computation of Revolving Credit Finance Charges-Death and Rebirth of the Previous Balance Method in New York, Johnstone, J. M. (1972). Consumer Credit-Computation of Revolving Credit Finance Charges-Death and Rebirth of the Previous Balance Method in New York. Cornell L. Rev., 58, 1055.

Rate Limitations, Interest and Usury, Higgs, J. H. (1977). Rate Limitations, Interest and Usury. Bus. Law., 33, 1043.

Consumer credit rate disclosure in the United Kingdom and Australia: A functional and comparative appraisal, Duggan, A. J. (1986). Consumer credit rate disclosure in the United Kingdom and Australia: A functional and comparative appraisal. International & Comparative Law Quarterly, 35(1), 87-105.

Implementation of the Fair Credit and Charge Card Disclosure Act of 1988: The Regulatory Response, Gelb, J. W., & Cubita, P. N. (1989). Implementation of the Fair Credit and Charge Card Disclosure Act of 1988: The Regulatory Response. The Business Lawyer, 1427-1438.

Creditors in the Consumer Protection Age, Kim, S. H., & Farragher, E. J. (1978). Creditors in the Consumer Protection Age. International Journal of Comparative and Applied Criminal Justice, 2(2), 177-189. A decade has passed since the Truth-in-Lending Act was enacted by the U.S. Congress. Congressional intent was one-sided in favor of American consumers. The Act was an outgrowth of large-scale fraud and some serious abuses that had existed in the consumer credit industry. Evidence indicates that these two factors—consumer dissatisfaction and consumer protection—are now world-wide phenomena. The only difference is that the consumer movement in the United States is more active than in the rest of the world. This paper attempts: (1) to review the evolution of consumer protection legislation in the United States; (2) to describe the important elements of the Truth-in-Lending Act; and (3) to assess the effects of the Act. The paper may serve as a case study of “consumerism” in the Western world. This is because consumers in the Western world are undergoing common cultural changes: (1) they are more interested in societal goals than in material goals; (2) they are entering a more advanced stage of cultural-economic development which enables some people to spend the time, money, and effort necessary to watch over other people and their physical environment; (3) they are more concerned with environmental problems than ever before; and (4) young people who have tended to be more idealistic and humanistic than old people, play an active role in the cultural change underlying consumerism.

Was this article helpful?