Float is the existing difference between the given book balance and the actual bank balance of an account. For example, you open a bank account, say, with $500. You do not receive any interest on the $500 and you also do not pay a fee to have the account.
Now, think what you do when you get a utility or water bill. You receive your water bill and say, it is for $100. You can write a check for $100 and then mail it to the particular water company. When you write the $100 check, you also file the transaction or payment in the bank register. The value your bank register reflects is the book value of the account. The check may be “in the mail” for a few days. Then after the water company receives, it may take several more days before it is cashed.
Now, between the moment you initiate or write the check and the moment the bank cashes the check, there will obviously be a difference in the book balance and the balance your bank lists for your checking account. That difference is known as float.
It is important to note that the float can be managed. If you already have the info that the bank will not get to know about your check for five days, you could also invest the $100 in a savings account at the bank for the five days. Then at the “just in time” you can replace the $100 in your checking account to cover the $100 check.
|Time||Book Balance||Bank Balance|
|Time 0 (make deposit)||$500||$500|
|Time 1 (write $100 check)||$400||$500|
|Time 2 (bank receives check)||$400||$400|
Float is calculated by subtracting the book balance from the bank balance.
Float at Time 0: $500 − $500 = $0
Float at Time 1: $500 − $400 = $100
Float at Time 2: $400 − $400 = $0