How to Calculate Average Balance or Average Daily Balance on the Investment Income Allocation Form

Overview

The Investment Income Allocation Form may require either an average balance or an average daily balance, depending on your process or reporting requirements.

This article explains:

• • what each calculation means
  • how to calculate average balance
  • how to calculate average daily balance
  • how to use each method accurately

Quick links

• • What is the difference between average balance and average daily balance
  • How to calculate average balance
  • How to calculate average daily balance
  • Example calculation
  • Frequently asked questions

What is the difference between average balance and average daily balance

Average balance

Average balance is calculated by adding together a set of balances and dividing by the number of balances included.

This method is often used when balances are captured at specific intervals rather than every day.

Average daily balance

Average daily balance is calculated by adding the balance for each day in the billing cycle or reporting period and dividing that total by the number of days in the cycle.

This method shows the average amount carried over time and is commonly used when calculating interest or allocating income based on daily balances.

Note: Use the calculation method required by your organization or by the form instructions.

How to calculate average balance

Steps

1. 1. Identify the balances that need to be included in the calculation
   2. Add all balances together
   3. Divide the total by the number of balances used

Formula

Average Balance = Total of Balances ÷ Number of Balances

Example

If the balances are:

• • $1,000
  • $1,500
  • $2,000

Then:

• • Total = $4,500
  • Number of balances = 3
  • Average balance = $4,500 ÷ 3 = $1,500

How to calculate average daily balance

Steps

1. 1. Identify the full billing cycle or reporting period
   2. Record the balance for each day in that period
   3. Add all daily balances together
   4. Divide the total by the number of days in the cycle

Formula

Average Daily Balance = Total of Daily Balances ÷ Number of Days

Important reminder

To calculate average daily balance correctly, include the balance for every day in the cycle, even if the balance did not change on some days.

Example calculation

Assume a 5-day period with the following balances:

• • Day 1: $100
  • Day 2: $100
  • Day 3: $150
  • Day 4: $150
  • Day 5: $200

Step 1: Add the daily balances

$100 + $100 + $150 + $150 + $200 = $700

Step 2: Divide by the number of days

$700 ÷ 5 = $140

Result

The average daily balance is $140.

When to use each method

Use average balance when:

• • balances are reviewed at selected points in time
  • the form or process asks for a general average of listed balances
  • daily balance tracking is not required

Use average daily balance when:

• • the calculation must reflect activity across each day in a period
  • the form or process is based on daily account balance changes
  • interest or allocation calculations depend on daily values

Frequently asked questions

What does average daily balance measure?

• • It measures the average balance carried over a specific period of time by using each day’s balance in the calculation.

What if the balance stays the same for several days?

• • Include that same balance for each day it remained unchanged.

Do I need every day in the period for average daily balance?

• • Yes. To calculate average daily balance accurately, you should include the balance for every day in the reporting period.

What if I only have a few balance amounts and not daily balances?

• • In that case, you may need to calculate average balance instead of average daily balance, unless your process specifically requires daily data.

Which method should I use on the Investment Income Allocation Form?

• • Use the method required by your organization’s process or by the form instructions.

Example calculations are below: