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Accounting in Banks
Objectives
At the end of the module, you will be able to:
Define and explain the accounting principles and
concepts.
Explain the conceptual difference between the cash
and accrual methods of accounting.
Explain the rules of debits and credits and their use
as applied to double entry accounting practice
Explain the five basic accounts: Assets, Liabilities,
Ownership Equity, Income and Expenses.
Explain the basic balance sheet equation: Assets,
Liabilities and Ownership Equity.
Explain and demonstrate the posting of accounting
Introduction
What is Accounting?
Accounting Jargons
Every subject and profession have their own typical jargons.
Accounting is no exception. The following are some of the terms
which one should know to proceed further. Given their strong
inter-relationship, they can not be explained in any specific
order. These are basic definitions only; each of them have been
explained
in more
details later in Journals
this module.
Financial
Transactions
Debit and Credit
Transactions
Posting
Accounts
Accounting Period
Balance Sheet
Income and Expenditure
Account
Receivables
Payables
General Ledger
Assets
Liabilities
Owners Equity
Double Entry Accounting
Subsidiary Ledger
System
This is only a partial list. You can find most of the terms and
their definitions at
http://www.a-z-dictionaries.com/glossaries/Accounting_Glossary
Types of Accounts
An element for the purpose of accounting is that aspect relating
to which we wish to find/know information.
Each element in accounting is identified as an account or an
accounting head.
Capital Account
Furniture Account
Cash Account
Bank Account
Bobs Account
Harrys Account
Salaries Account
Interest on Loans
Account
Types of Accounts
Whatever may be the number of accounting heads/elements an
organizational accounting is divided into; it broadly falls into the
following 3 types of accounts:
Accounts - Elements in
Accounting
Personal
Accounts
Real
Accounts
Natural
Artificial
Tangible
Bobs A/c
Harrys
A/c
MSats A/c
TechMs
A/c
Cash A/c
Bank A/c
Furniture
A/c
Intangibl
e
Goodwill
A/c
Patents
A/c
Nominal
Accounts
Income
Interest
on Loans
A/c
Commissi
on A/c
Expendit
ure
Salaries
A/c
Interest
on
Deposits
A/c
Format of Accounts
All the Account types, including the sample ones we
considered, have the same format.
Capital Account
Balanc
Date Particulars
Debits Credits
e
25000.0
31-Jan-10 By cash
0
Cash Account
30000.0
5-Feb-10
By cash
5000.00
0
Date
Particulars
Debits
Credits Balance
20000.0
25-Feb-10 To self
10000.00
0
25000.0
31-Jan-10 To Capital
25000.00
0
15000.0
Bank
Account
11-Mar-10 To self
5000.00
0
Date Particulars
Debits Credits Balance
20000.0
5-Feb-10 By Receipts
5000.00
0
25000.0
31-Jan-10 To Bank
25000.00
0
30000.0
25-Feb-10 To Capital
10000.00
0
20000.0
The number 5-Feb-10
of accounts
required
by
an
organization
By Receipts
5000.00
0 depends
upon the degree of details it needs. If bank accounts- are
30000.0
maintained at
3
banks,
the
organization
may
prefer
25-Feb-10 To Bank
10000.00
0to have 3
1. Assets
2. Liabilities
3. Owners Equity
At any point of time, the sum of Liabilities and Owners Equity
has to be equal to Assets. Going forward, we shall see how this
equation is maintained while effecting the financial
transactions.
Balance Sheet
A Balance Sheet is a financial statement that summarizes a
company's assets, liabilities and shareholders' equity at a
specific point in time. Each entry in Balance Sheet correspond
to an Account in General Ledger.
It typically takes the following form:
900.00 Payables
800.00
2900.0
Total
0
Amoun
t
700.00
2200.0
0
2900.0
0
Assets
Particulars
Amoun Particulars
t
Deposits
2000.00 Cash
Borrowings
200.00 Securities
Shareholder's Equity
100.00 Loans
Other Assets
Amoun
t
50.00
500.00
1500.00
250.00
2300.00
Trial Balance
Trial Balance is a replica of Balance Sheet excepting that it has
rows for Income and Expenditure also. Whereas a Balance
Sheet is prepared once a year for the entire organization, a Trial
Balance is prepared at the end of each business day at each
branch of a bank.
Liabilities
Assets
Particulars
Amou Particulars
nt
Deposits
2000.0 Cash
0
50.00
Borrowings
200.00 Bank
500.00
Income
300.00 Loans
Expenditure
Amoun
t
1700.00
250.00
Total Liabilities
2500.0
Total Assets
2500.00
The outstanding
balances
of accounts
maintained
in the
General Ledger are mapped 0in the Trial Balance. Expenditure
account is placed under Assets and Income account is placed
under Liabilities.
Chart of Accounts
A chart of accounts is a listing of the names of the accounts
that an organization has identified and made available for
recording transactions in its General Ledger. The organization
has the flexibility to tailor its chart of accounts to best suit its
needs, including adding accounts as needed.
A chart of accounts will likely be as large and as complex as the
organization itself. An international bank with several divisions
and subsidiary may need thousands of accounts, whereas a
small local bank may need as few as one hundred accounts.
The Trial Balance is a listing of the Chart of Accounts with
outstanding balances. There may be several accounts which
have been defined by the bank, but they do not have any
outstanding balances. Those Account Heads may not appear in
the Trial Balance.
Accrual
The
cash
basis
recognizes The accrual basis of accounting,
receipts and payments only when on the other hand, recognizes the
cash changes hands.
receipts and payments when
they are incurred; it does not
Many small operations use the matter when cash is actually
cash basis of accounting for their received or paid.
type of business; no requirement
exists to prepare and report their
financial position to external
users.
Personal
Accounts
Real Accounts
Nominal
Accounts
Account Type
Debit Effect
Credit Effect
Assets
Increase
Decrease
Liabilities
Decrease
Increase
Shareholder's
Equity
Decrease
Increase
Income
Decrease
Increase
Expenditure
Increase
Decrease
Journal Entries
The following will be the Journal Entries if Bob is depositing
cash in his account.
DATE
PARTICULARS
L. DEBIT
CREDI
F
T
01 Jan
Cash A/c
1000.00
Dr
1000.0
Bobsthe
Deposit
0
It is customary toToplace
Debit A/c
entries first followed by Credit
entries. Dr, Cr and A/c are abbreviations for Debit, Credit and
Account respectively.
Vouchers
Accounting
Lets evaluate the effects of the Journal Entry Bob
depositing cash in his deposit account. Below is the
Trial Balance after the transactions were posted in
respective accounts in General Ledger.
Prev.
Balan
ce
2000
Trial Balance
Liabilities
Assets
Particulars
Amou Particulars
nt
Amoun
t
Deposits
3000.0 Cash
0
1150.00
Borrowings
200.00 Bank
600.00
Other Liabilities
400.00 Loans
Furniture
Income
300.00 Expenditure
Prev.
Balan
ce
150
1700.00
200.00
250.00
Total
Assets 3900.0
Notice that
the Deposits 3900.0
Account Total
as well
as Cash Accounts have
Liabilities
0
0
increased thereby increasing the Total Liabilities and Total
Assets of the Bank.
Accounting
Similar is the case after the Debit and Credit vouchers
were posted to pay the monthly rent. Below is the
Trial Balance after the transactions were posted in
respective accounts in General Ledger.
Prev.
Balan
ce
3000
Trial Balance
Liabilities
Assets
Particulars
Amou Particulars
nt
Amoun
t
Deposits
14500. Cash
00
1150.00
Borrowings
200.00 Bank
600.00
Other Liabilities
400.00 Loans
Furniture
Income
300.00 Expenditure
1700.00
Prev.
Balan
ce
250
200.00
11750.0
0
Accounting
In both the previous cases, we saw that the transactions were
increasing the Total Liabilities and Total Assets of the branch.
That was because, in both the cases, while one transaction was
posted in a account under the Assets, the other was posted in
an account under Liabilities.
There may be instances where a Journal Entry will not change
the Total Liabilities and Total Assets figures.
Consider the following Journal Entry. The branch is purchasing
some office furniture for Rs. 500/- by paying cash.
DATE
PARTICULARS
01 Jan
Furniture A/c
Dr
To Cash A/c
L.
F
DEBIT
CREDI
T
500.00
500.00
Accounting
Below is the Trial Balance after the transactions were
posted in respective accounts in General Ledger.
Trial Balance
Liabilities
Assets
Particulars
Amou Particulars
nt
Deposits
14500. Cash
00
650.00
Borrowings
200.00 Bank
600.00
Other Liabilities
400.00 Loans
Furniture
Income
300.00 Expenditure
Amoun
t
Prev.
Balan
ce
1150
Prev.
Balan
ce
250
1700.00
700.00
11750.0
0
Notice that both the Debit and Credit transactions have been
Total
15400.
Total While
Assets
posted in
the accounts under
Assets.
the15400.
balance is Cash
00
00
Account Liabilities
has decreased, the balance
in Furniture Account
has
been increased by an equal amount thereby keeping the Total
Assets unchanged.
Accounting
So far we have considered only Simple Journal Entries effecting
2 accounts only. Compound Journal Entries involve transactions
in more than 2 accounts.
Lets consider a transaction in Suspense Account to
demonstrate Compound Journal Entries.
John, an employee of the bank asks for a Travelling Advance of
Rs. 10,000/-. The exact expenditure on travel is not known at
this point of time.
So the following Simple Journal Entry will be passed to credit
Johns
with Rs. 10,000/DATE account
PARTICULARS
L. DEBIT
CREDI
F
T
01 Jan
Suspense A/c
Dr
To Johns A/c
10000.0
0
10000.
00
Accounting
The resulting Trial Balance will look like the following.
Prev.
Balan
ce
14500
Trial Balance
Liabilities
Assets
Particulars
Amou Particulars
nt
Amoun
t
Deposits
24500. Cash
00
1150.00
Borrowings
200.00 Bank
600.00
Other Liabilities
400.00 Loans
Furniture
Suspense A/c
Income
300.00 Expenditure
1700.00
Prev.
Balan
ce
0
200.00
10000.0
0
11750.0
0
Accounting
When John will submit the bill, the Suspense Account entry will
get wiped out and 3 accounts will be effected.
Lets say, John is submitting bills for Rs. 7000/-. He has to
refund the excess amount over the bill, i.e., Rs. 3000/-.
The following Journal Entry will be passed. This is an example of
a Compound Journal Entry.
DATE
PARTICULARS
L.
F
DEBIT
CREDI
T
15 Jan
Expenditure A/c
7000.00
Dr
3000.00
Johns A/c
10000.
Dr
00
The actual Travelling
Expense is Debited to Expenditure
To Suspense
A/cto Johns deposit account.
Account. Excess advance
is Debited
The total Debit amount is credited to the Suspense Account.
Accounting
The resulting Trial Balance will look like the following.
Prev.
Balan
ce
24500
Trial Balance
Liabilities
Assets
Particulars
Amou Particulars
nt
Amoun
t
Deposits
21500. Cash
00
1150.00
Borrowings
200.00 Bank
600.00
Other Liabilities
400.00 Loans
Furniture
Suspense A/c
Income
300.00 Expenditure
1700.00
200.00
0.00
18750.0
0
Prev.
Balan
ce
10000
Prev.
Balan
ce
11750
Total
Assets
22400.
Notice that
the Suspense22400.
AccountTotal
is newly
created
with this
Liabilities
00
00
transaction.