Samir K Mahajan

Bank Balance SheetsSources and Uses of Funds of Bank

Financial Statement of an Enterprise

Balance Sheet

Profit and Loss Account

LIABILITIES

Liabilities are the obligations payable by the enterprise in future in the form of money orgoods or services. Liabilities are proprietors’ and creditors’ claims against the assets ofthe business.

Balance Sheet contd.

ASSETSAssets are what firm owns. Assets/properties are the valuable thing/ economic resourcesowned the firm/enterprise. Assets are measured in money terms)

Balance Sheet contd.

In accounting sense,

Assets= Liabilities + Capital + (Revenues – Expenses)

Balance Sheet contd.

BALANCE SHEET OF FIRM XYZ AS ON 31ST MARCH 2013

Liabilities and Capital Amount(Rs) Assets Amount(Rs)

Fixed Liabilities Loans Debentures Mortgages

Fixed Liabilities Lands Building Plants & machines Fixtures & filings

Capital / Owner’s Equity

Investments

Reserves and Surpluses Current Liabilities

Short term loans sundry creditors Bills payables

Outstanding expenses

Current Assets Cash in hand & bank Stock of inventories Sundry debtors Receivables Prepaid expenses Accrued income

Balance Sheet

Equity component/ Net worthcomprises of the following:

Capital/Share Capitalo authorisedo issuedo subscribedo paid up-capital

Reserves & Surpluso Statutory reserveso Capital Reserveso Share Premiumo Revenue &other reserves

Debt component comprises of thefollowing:DepositsBorrowingsInterest accrued on borrowings and

depositsOther liabilities and provisionsOthers

Bank Liabilities /Sources of Bank FundsLiabilities of a bank can be classified as type of debt and equity components.

Classification of Capital of Corporation (Public Limited Company)

The company has to show the authorised, subscribed and paid up-capital under capitalhead.

o Authorised capital/registered capital is the total of the share capital which a limitedcompany is allowed (authorised) to issue.

Capital Requirement (long run) = Rs. 100000

Authorized Capital = Rs. 100000

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Classification of Capital of Corporation (Public Limited Company)

o Issued capital is the total of the share capital issued (allocated) to shareholders. Thismay be less or equal to the authorised capital.

Current Requirement = Rs. 50,000

Issued Capital = Rs. 50,000 (5000 share @Rs.10 per share)

Samir K Mahajan

Classification of Capital of Corporation (Public Limited Company)

o Subscribed capital is the portion of the issued capital, which has been subscribed by allthe investors including the public. This may be less than or more than the issued capital.

Subscribed capital= Rs. 40,000 (4000 shares @ Rs. 10 per share)

Samir K Mahajan

Classification of Capital of Corporation (Public Limited Company)

o Called up capital is the total amount of subscribed capital for which the shareholdersare required to pay. This may be less than the subscribed capital as the company mayask shareholders to pay by instalments.

If 4,0000 shares of Rs. 10 each have been subscribed by the public, and of which Rs. 5 pershare has been called up.

Called up capital= Rs. 20,000

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Capital /share capital : An Illustration Liabilities contd.

o Paid up capital is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in instalments ("calls-in-arrears"). Some of the shareholders might have defaulted in paying the called up money.

If some of the shareholders have defaulted in paying the called up money, say:

Paid Up capital = Rs. 10000 (2000 share @ Rs 5 per share).

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Capital /share capital : An Illustration Liabilities contd.

o Reserve Capital : It is that part of uncalled capital of a company which can be called only in the event of its winding up

Hence Reserve capital = Rs 20000

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Reserve & Surpluses

Surpluses: Surplus is the credit balance of the profit and loss account after providing fordividends, bonus, provision for taxation and general reserves etc. Balance of profit iscarried forward in next year as retained earnings.

Reserve : Reserve means a provision for a specific purpose. There are lots of unknownexpenditures which can occur in current year or in future. To meet such type ofexpenses the business firm has to make the reserves.

Bank Liabilities contd.

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Reserve and surpluses contd.Typically the banks have to hold Statutory reserves, Capital Reserves, Share PremiumRevenue and other reserves under this head.

o Statutory reserves, any banking company has to create a reserve fund out of the profiteach year disclosed in the profit and loss account. Such transfers to the reserve fundswill be before any dividend is declared, the amount being equivalent to not less than20 percent of the profit.

Bank Liabilities contd.

Reserve and surpluses

o Capital reserve: Capital reserve arises as a result of capital gains (capital profit) andnot revenue profits. It is created out of profit earned from some specific capitaltransactions say profit from sale of investment or fixed assets, sale of equity share at apremium. Capital reserve are not distributed as dividends. Capital reserve arepermanently invested such as in future capital investment and expansion.

Note: Share premium is the amount received by a company over and above the facevalue of its shares. This difference between the selling price and the face value of a shareis known as share premium.

Bank Liabilities contd.

Revenue Reserve: Retained earnings refers to the portion of net income/profit of a corporation that isretained with bank rather than distributing to shareholders as dividends. This can be distributed asdividend and also as bonus shares. A company may elect to utilize retained earnings in a number of ways,such as:

To meet the financial position or improve (strengthen) overall financial status and health of an enterprise

To settle any unknown future contingencies say inflation or deflation To increase the working capital To issue of bonus shares to shareholders To pay dividend to shareholders when profits are insufficient. to offset some specific future losses To meet litigation etc.

Reserve and surplus

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DepositsDeposits includes demand deposits, saving deposits, term deposits (such as: fixeddeposits, recurring deposits, reinvestment deposits, cash certificates, certificates ofdeposits), NRI deposits.

BorrowingsBorrowing is shown under two categories:o Borrowings in India such( as: refinance from RBI, NABARD, SIDBI etc, borrowing from

other banks or financial institutions, call/notice money market)o Borrowing outside of India

Bank Liabilities contd.

Interest accrued on borrowings and deposits

Inter-office adjustment i.e. net credit balance (claims of other banks over the bank is more than claim of later over former)

Other liabilities and provisions such as bills payable arising out of fee-based services such as: demand drafts, banker’s cheque, travellers’ cheque etc.

Others such as: unclaimed dividends, provision/funds for specific purposes, unexpireddiscount.

Bank Liabilities contd.

The funds mobilised from various sectors of the economy are deployed intoproductive sectors of the economy. The credit thus deployed forms the assets on thebank’s balance sheet.

Assets of a bank includes the following :Cash HoldingsInvestmentLoans and advancesFixed assetsOther assets

Bank Assets /uses of funds

Cash Holding

Cash holding by bank would comprise ofo cash in the bank’s vault including foreign currencies and cash balance with

overseas branches of the banko balances/deposits (cash reverses requirement)with RBI

o balances with other banks held for clearing house requirement and otheruses

o money at call and short notice

Bank Assets contd.

Investmento government securitieso approved securitieso shareso debentures and bondso subsidiaries and joint ventureso other investments

Bank Assets contd.

Loans and advancesLoans and advances includes bills purchased and discounted, cash credits, overdraftsand loans repayable on demand, term loans.

Fixed assets Fixed assets includes premises including land, furniture and fixtures, assets on lease etc. These are of small size.

Interest accrued on investment and advances but not collected

Bank Assets contd.

Other assets includes o advance expenses

o Inter-office adjustment i.e. net debit balance o advance tax paid/tax deducted at sources o stationaries and stampso non-banking assets (such as immovable property or tangible assets )

acquired in satisfaction of claims

Bank Assets contd.

BALANCE SHEET OF Bank XYZ AS ON 31ST MARCH 2013

Liabilities and Capital Amount(Rs)

Assets Amount (Rs)

Deposits

demand Deposits Short Term Deposits Term Deposits

Cash Cash at bank’s vault Balances (CRR) with RBI Balances with other banks

Borrowings Loans and advances Short term Term Loans

Capital authorised subscribed paid up-capital

Investments government securities approved securities shares debentures and bonds subsidiaries & joint ventures other investments

Reserves and Surpluses Statutory reserves Capital Reserves Share Premium Revenue &other reserves

Fixed Assets land furniture and fixtures assets on lease

Other liabilities and provisions

Other assets

Total Total

Contingent liabilities

Liabilities occur out of past events. But contingent liabilities are possible obligation which may arise depending on some future happenings.

Contingent liabilities are off balance sheet items.

o Say Bank guarantee, letter of credit,

Income statement of Indian banks/ Profit & Loss Account

Income statement has two aspect such as: Revenue Expenses .

Profit & Loss Account contd.

Income/Revenue of the bank :

Interest income earned which includes interest/discount on advances/ bills

Income from investment which includes dividends and interest income earned from bank’s investment portfolio.

Interest on balances with RBI , other inter-bank funds , call loans

Profit & Loss Account contd.

Income/Revenue contd.

Other non-interest income

o Commission, exchange and brokerage

o Profit and loss on sale of investment

o Profit/loss on revaluation of investment

o Profit/loss on sale of buildings and other assets

o Profit earned through foreign exchange dealings

o Dividend earned from subsidiaries, joint ventures o Miscellaneous income

Expenses of bank comprises

Interest expended o Interest on deposits

o Interest on RBI/interbank borrowings, refinance from other banks

o Other interests such as interest on borrowings/refinance from financial institutions

Income statement contd.

Expenses of bank contd. Income statement contd.

Operating expense o Payment to and provisions for employeeso Rents, taxes and lightingo Printing and stationeries o Advertisement and publicity o Depreciation on bank’s propertyo Directors’ fees, allowances and expenses o Auditor’s fees and expenseso Legal chargeso Postage, telephoneo Repairs and maintenanceo Insurance,o Taxeso Diminution in the value of investmentsOther expenses which includes provisions and contingencies for loans

losses/bad loans

Income statement

Net Income= Total income (Revenue) –Total Expenses – Taxes

Total income (Revenue) includes total interest + non-interest income + profit/loss on sale of investment

Total expenses include interest expenses, operating expenses and provisions .