Water balance calculations are becoming increasingly important for earth-system studies. Precipitation is one of the most critical input variables for such calculations because it is the immediate source of water for the land surface hydrological budget. Numerous precipitation datasets have been developed in the last two decades, but these datasets often show marked differences in their spatial and temporal distribution of this key hydrological variable. This paper compares six monthly precipitation datasets—Climate Research Unit of University of East Anglia (CRU), Willmott–Matsuura (WM), Global Precipitation Climate Center (GPCC), Global Precipitation Climatology Project (GPCP), Tropical Rainfall Measuring Mission (TRMM), and NCEP–Department of Energy (DOE) Atmospheric Model Intercomparison Project (AMIP-II) Reanalysis (NCEP-2)—to assess the uncertainties in these datasets and their impact on the terrestrial water balance. The six datasets tested in the present paper were climatologically averaged and compared by calculating various statistics of the differences. The climatologically averaged monthly precipitation estimates were applied as inputs to a water balance model to estimate runoff and the uncertainties in runoff arising directly from the precipitation estimates. The results of this study highlight the need for accurate precipitation inputs for water balance calculations. These results also demonstrate the need to improve precipitation estimates in arid and semiarid regions, where slight changes in precipitation can result in dramatic changes in the runoff response due to the nonlinearity of the runoff-generation processes.