Briefing

Date: 2015-10-07; view: 678.

Banks necessarily use sophisticated accounting systems to record as clearly as possible what the financial situation of the bank is. Normally such a system is based on the principle of the double entry, which means that each transaction is entered twice, as a credit in one account and as a debit in another account. The equation can be expressed as: ASSETS = CAPITAL + LIABILITIES. If we deposit £100 with a bank, for example, the bank enters a debit for the receiver and a credit for the giver. The former represents an asset to the bank, since it is a sum of money at the bank's disposal, as well as a liability, since it will one day have to be repaid.

The balance sheet of a bank gives us a view of its financial situation at one point in time, usually 31 December of a particular year. But we do not know what has happened between two balance sheets. This information is provided by the profit and loss account for the period in question. The profit and loss account is also referred to as an operations statement or an income and expense statement. Neither statement is exactly uniform from bank to bank, but both contain certain essential features.

The largest asset of a bank is normally its total portfolio of loans. Deposits usually constitute the largest liability. Balance sheets usually include the following items listed as assets:

• Cash on hand and due from banks – money in vaults,

balances with other banks, cheques in process of collection.

• Investments – bonds, shares, etc.

• Loans – to companies, the general public, etc.

• Fixed assets – buildings, equipment, etc.

Items listed in the balance sheet as liabilities are:

• Deposits – all money owed to depositors

• Taxes payable – national and local

• Dividends payable – decided on, but not yet paid

The profit and loss account records the income of a bank, and here, typically, the items in order of size are:

• interest on loans

• return on investments

• fees, commissions, service charges

The granting of credit provides the largest single source of bank income. Typically, two thirds of an American commercial bank's yearly earnings result from interest on loans. Nine out of every ten dollars they lend come from depositors' funds.

The following items normally constitute the main expenses in a bank's profit and loss account, again in typical order of size:

• interest paid

• salaries and other benefits

• taxes

A bank's accounting systems, then, are designed to record and present the many transactions that take place every day. Substantial reserves over and above statutory requirements are an indication to customers of the bank's strength, that it has run its business well and has retained profits in the business for future operations. Profitability indicates the effectiveness of a bank's performance and how well it has managed the resources under its control. Published figures thus provide some essential data on the liquidity, safety and income of a bank.

• Read the briefing

• Check your comprehension and answer the following questions:

1. Why is sophisticated accounting system so widely used by banks? Can you define the main principle of this system?

2. What is the name of a summarised statement showing the amount of funds employed in the business and the sources from which these funds are derived?

3. Which important financial information is not provided by the balance sheet?

4. Which indices give us a view of the financial situation of a bank and which items are listed as assets or as liabilities?

5. How are incomes and expenses recorded in the profit and loss account?

6. Can you mark the difference between two basic financial statements?

7. Why does a bank's portfolio of loans provide the largest source of bank income?

8. What's accounting period for the balance sheet? Does it correspond with the calendar year?

9. What do published figures of a bank's performance show?

10. What kind of financial information do a bank's accounting systems provide its customers with?

• Say if the statements are true or false.

1. An important area of bank performance is accounting systems that provide a permanent record of its financial activities.

2. The principle of the double entry represents an asset to the bank as a debit in one account and a liability as a credit in another account.

3. The balance sheet of a bank shows the amount of fund sources the bank has drawn upon to finance its lending and investing activities and how much has been allocated to loans and other funds at a moment in time, usually the last day of a particular accounting period.

4. Each bank may have its own accounting requirements but basic principles are the same.

5. The profit and loss account shows how much profit was generated by the operations of the bank at one point in time.

6. The income and expense account provides information for the period in question, which means that it shows what has happened between two balance sheets.

7. Banks make their profits by lending the money which customers deposit with them to others who need it for personal or business reasons.

8. Impressive reserves over and above statutory requirements show how the bank has retained its profits in the business for future operations and the many transactions that take place every day.

9. Published figures provide some essential data on the bank's financial position and operating performance.

10. There is no difference between two basic financial statements as they both are the final product of accounting process and a valuable decision- making instrument.

• In this unit we hear three different bankers presenting facts and figures concerning the recent financial performance of their banks.