PROFORMA OF FINAL
ACCOUNTS OF BANKING
COMPANIES
Class 12 Banking
Profit & Loss Account and Balance Sheet
There are some notable differences between a bank’s accounts and any other
general company’s accounts. For example, banks maintain the accounts of
millions of Individuals, Corporate and other legal entities.
A bank’s Balance Sheet is ready on a daily basis, with the help of ‘Core
Banking’ software.
In a bank’s accounting, each and every transaction (either debit or credit) has
to be documented by a voucher.
Vouchers: In a bank’s accounting, all transactions - debit or credit – are documented by
vouchers. Some type of transactions during the day are bunched and documented by a single
voucher.
A Voucher is a:-
Formatted document in which the details of the transaction are recorded
Debit or credit
Head of account
Amount of the transaction
Date of the transaction
Branch name etc. and
Authenticated by an authorized official
Debit and credit vouchers are in different colours for easy identification and processing.
The vouchers are then posted directly into the respective ledger accounts, skipping the step of
first entering in a ‘Journal’. (In companies’ accounts, a ‘Journal’ which is a book of original
entry is maintained as the first step and entries are posted in the ledger accounts thereafter).
Credit vouchers - three types:
1) One is the ‘Pay-in-Slip’- initiated by customer. Some banks use different Pay-in-slips for different
types of accounts. Multiple pay-in-slips will be convenient for processing but also will be expensive
for the banks. Now a days most banks have a single common Pay-in slip for all accounts.
2) Second type of pay-in-slip is specific for use for the purpose of
remittances (Drafts, Mail Transfers, Pay orders etc.). In the above two cases,
the customer initiates the transactions.
3) In the third type, Bank’s internal vouchers. Internal voucher is in another
standardised format which is prepared by the bank staff when bank itself
initiates a transaction - crediting periodical interest to the depositors’
accounts –debiting interest to customer’s loan account etc.
These vouchers are authenticated by the authorised officials of the bank.
Rules for the three accounts respectively are:
‘Debit what comes in and Credit what goes out’
‘Debit the receiver and Credit the giver’ and
‘Debit expenses and Credit incomes’.
The Main Day Book which is prepared for each working day is simply a summary of the total
amounts of debits and credits under the three categories of Cash, Clearing and Transfer in all
the Heads of Accounts.
General Ledger (GL): The GL consists of separate folios for each Head of Account in which the
branch has conducted transactions at any time.
Trial Balance (TB): It is simply a list of all the Heads of Accounts that have some outstanding
balances, with their outstanding balances listed and showing whether they are Dr. Balances or
Credit Balances.
After all the outstanding balances are extracted and copied in the TB from the GL, if the totals
are arrived at for the Dr. and the Cr. Columns of the TB, they should be the same.
Trial Balance (TB)
Head of Account Dr. or Cr. Dr. Balance Cr. Balance
………………….
Savings Bank Cr. 1,45,35,35,156
Overdrafts Dr. 84,27,13,128
Profit & Loss account
A financial statement that summarizes the revenues, costs and expenses
incurred during a specific period of time - usually a fiscal quarter or year.
The statement of profit and loss follows a general form. It begins with an
entry for revenue and subtracts from revenue the costs of running the
business, including cost of goods sold, operating expenses, tax expense and
interest expense. The bottom line (literally and figuratively) is net income
(profit).
The balance sheet, income statement and statement of cash flows are the
most important financial statements produced by a company. While each is
important in its own right, they are meant to be analyzed together.
The basic function of a bank is to accept deposits and give out loans. On the
loans that it gives out, it charges an interest rate. This interest earned is the
key revenue source for a bank. This term is known as ‘interest income’.
Expenditures: The key expense of a bank is interest on deposits that are made
with it. These could be in the form of term(fixed) or savings bank account
deposits.
The second biggest expense head for a bank would be its operating expenses.
This head would include all operational costs. It includes employee costs,
advertisement and publicity costs, administrative costs, rent, lighting and
stationary.
Balance sheet
A balance sheet (also known as a statement of financial position) is a formal
document that follows a standard accounting format showing the same
categories of assets and liabilities regardless of the size or nature of the
business.
Balance Sheet is the financial statement of a company which includes assets,
liabilities, equity capital, total debt, etc. at a point in time. Balance sheet
includes assets on one side, and liabilities on the other. For the balance sheet
to reflect the true picture, both heads (liabilities & assets) should tally
(Assets = Liabilities + Equity).
Computerisation of Bank Accounting-So with the introduction of CBS, Banks’
Balance Sheets are now available on a daily basis – as compared to a few
months’ lag when manual processing was the only way.
Preparation of Final Accounts of Banking Companies: In the case of branch
accounts at the year end, there are very few ‘adjustment entries’ like
provision for expenses accrued but not paid, like electricity, water, telephone
bills to be paid for the period up to 31stMarch, and prepaid expenses like rent
paid in advance etc.
The principle is that the expenditure made for a period beyond the balance
sheet date is an asset for the bank and so the proportionate amount which
pertains to the next year is debited to the account called ‘Prepaid expenses
account’ and credited to the respective expenditure account. For example
when the rent is paid, the bank pays one month rent extra by debiting ‘Rent
Paid account’.
In the case of a bank as a whole the P & L Account and the Balance Sheets are
prepared and made available to the public as at the end of every quarter –
June, September, December and March. Out of these four, the half-yearly
balance sheet as on 30th September and the yearly balance sheet as on 31st
March are more important.
The balance sheet of the bank comprises of two sides; the assets side and the
liabilities side. It is customary to record liabilities on the left side and assets
on the right side. The following is the Performa of a balance sheet of the
bank.
Balance Sheet of the Bank
Liabilities-Liabilities are those items on account of which the bank is liable to
pay others. They denote other’s claims on the bank. Details of the various
items on the liabilities side are as follows:
1) Capital-
The bank has to raise capital before commencing its business.
A) Authorised capital is the maximum capital up to which the bank is
empowered to raise capital by the Memorandum of Association. Generally, the
entire authorised capital is not raised from the public.
B) That part of authorised capital which is issued in the form of shares for public subscription is
called the issued capital.
C) Subscribed capital represents that part of issued capital which is actually subscribed by the
public.
D) Paid-up capital is that part of the subscribed capital which the subscribers are actually called
upon to pay.
2) Reserve Fund-
Reserve fund is the accumulated undistributed profits of the bank.
The bank maintains reserve fund to tide over any crisis. But, it belongs to the shareholders and
hence a liability on the bank.
In India, the commercial bank is required by law to transfer 20 per cent of its annual profits to
the Reserve fund.
3) Deposits-
The deposits of the public like demand deposits, savings deposits and fixed deposits constitute
an important item on the liabilities side of the balance sheet.
The bank can never afford to forget the claims of the depositors.
4) Borrowings from Other Banks-
Under this head, the bank shows those loans it has taken from other banks. The bank takes loans
from other banks, especially the Central bank, in certain extraordinary circumstances.
5)Bills Payable-
These include the unpaid bank drafts & transfers issued by the bank. These drafts and transfers
are paid to the holders there of by the bank’s branches, agents and correspondents who are
reimbursed by the bank.
6) Acceptances and Endorsements-
This item appears as a contra item on both the sides of the balance sheet.
It represents the liability of the bank in respect of bills accepted or endorsed on behalf of its
customers and also letters of credit issued and guarantees given on their behalf.
For rendering this service, a commission is charged and the customers to whom this service is
extended are liable to the bank for full payment of the bills. Hence, this item is shown on both
sides of the balance sheet.
7) Contingent Liabilities-
Contingent liabilities comprise of those liabilities which are not known in
advance and are unforeseeable.
Every bank makes some provision for contingent liabilities.
8)Profit and Loss Account-
The profit earned by the bank in the course of the year is shown under this
head. Since the profit is payable to the shareholders it represents a liability
on the bank.
9)Bills for Collection-
This item also appears on both the sides of the balance sheet. It consists of
drafts and hundies drawn by sellers of goods on their customers and are sent
to the bank for collection, against delivery documents like railway receipt,
bill of lading, etc., attached thereto.
All such bills in hand at the date of the balance sheet are shown on both the
sides of the balance sheet because they form an asset of the bank, since the
bank will receive payment in due course, it is also a liability because the
bank will have to account for them to its customers.
Assets- Assets are the claims of the bank on others. The various items on the
assets side are as follows:
1) Cash- cash on hand refers to cash in the vaults of the bank. It constitutes
the most liquid asset which can be immediately used to meet the obligations
of the depositors. Cash on hand is called the first line of defence to the bank.
In addition to cash on hand, the bank also keeps some money with the central
bank or other commercial banks. This represents the second line of defence
to the bank.
2) Money at Call and Short Notice-
Money at call and short notice includes loans to the brokers in the stock
market, dealers in the discount market and to other banks. These loans could
be quickly converted into cash and without loss, as and when the bank
requires.
At the same time, this item yields income to the bank. The significance of
money at call and short notice is that it is used by the banks to effect
desirable adjustments in the balance sheet. This process is called ‘Window
Dressing’. This item constitutes the ‘third line of defence’ to the bank.
3) Bills Discounted- The commercial banks invest in short term bills consisting of bills of
exchange and treasury bills which are self-liquidating in character. If a commercial bank requires
additional funds, it can easily rediscount the bills in the bill market and it can also rediscount
the bills with the central bank.
4) Bills for Collection- As mentioned earlier, this item appears on both sides of the balance
sheet.
5) Investments- This item includes the total amount of the profit yielding assets of the bank. The
bank invests a part of its funds in government and non-government securities.
6) Loans and Advances- Loans and advances constitute the most profitable asset to the bank.
The bank earns quite a sizeable interest from the loans and advances it gives to the private
individuals and commercial firms.
7) Acceptances and Endorsements- As discussed earlier, this item appears as a contra item on
both sides of the balance sheet.
8) Fixed Assets-Fixed assets include building, furniture and other property owned by the bank.
This item includes the total volume of the movable and immovable property of the bank.
Fixed assets are referred to as ‘dead stocks’. The bank generally undervalues this item
deliberately in the balance sheet. The intention here is to build up secret reserves which can be
used at times of crisis.
Non performing asset (NPA)
A non performing asset (NPA) is a loan or advance for which the principal or
interest payment remained overdue for a period of 90 days.
NPAs are of 4 types:
1)Standard Assets: It is a kind of performing asset which creates continuous
income and repayments as and when they become due. These assets carry a
normal risk and are not NPA in the real sense of the word. Hence, no special
provisions are required for standard assets.
2)Sub-Standard Assets: Loans and advances which are non-performing assets
for a period less than or equal to 12 months, fall under the category of Sub-
Standard Assets.
3)Doubtful Assets: The Assets considered as non-performing for a period of
more than 12 months are known as Doubtful Assets.
4)Loss Assets: All those assets which cannot be recovered by the lending
institutions are known as Loss Assets.
As per RBI, “Loss asset is considered uncollectible and of such little value that
its continuance as a bankable asset is not warranted, although there may be
some salvage or recovery value.”
