OR
Explain the format as well as statement
provisions of preparing income statement and
balance sheet of any banking company
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Answers
Answer:
A typical balance sheet consists of the core accounting equation, assets equal liabilities plus equity. Under these accounts, some companies may have other large classes such as PP&E, intangible assets, current assets, accounts receivables, accounts payables, and such.
A bank, however, has unique classes of balance sheet line items that other companies won’t. The typical structure of a balance sheet for a bank is:
Assets
Property
Trading assets
Loans to customers
Deposits to the central bank
Liabilities
Loans from the central bank
Deposits from customers
Trading liabilities
Misc. debt
Equity
Common and preferred shares
Recall from CFI’s Balance Sheet Guide that ASSETS = LIABILITIES + EQUITY.
Financial Statements for Banks: Balance Sheet
A bank’s balance sheet has certain unique items. We visit each unique line item in the subsections below.
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Loans and Deposits to Customers
The main operations and source of revenue for banks are their loan and deposit operations. Customers deposit money at the bank for which they receive a relatively small amount of interest. The bank then lends funds out at a much higher rate, profiting from the difference in interest rates.
As such, loans to customers are classified as assets. This is because the bank expects to receive interest and principal repayments for loans in the future, and thus generate economic benefit from the loans.
Deposits, on the other hand, are expected to be withdrawn by customers or also pay out interest payments, generating an economic outflow in the future. Deposits to customers are, thus, classified as liabilities.
Loans and Deposits to Central Bank
In the questions of financial statements for banks, where do these banks store their money? It’s like the age-old question: do barbers cut their own hair?
The answer isn’t too crazy. Most countries have a central bank, where most (or all) national banks will store their money and profits. Deposits from a bank in a central bank are considered assets, similar to cash and equivalents for a regular company. This is because the bank can withdraw these deposits rather easily. It also expects to receive a small interest payment, using the central bank’s prime rate.
Loans from the central bank are considered liabilities, much like normal debt.
Trading Assets and Liabilities
Banks may hold marketable securities or certain currencies for the purposes of trading. These will naturally be considered trading assets. They may have trading liabilities if the securities they purchase decline in value.
Typical Income Statement for Banks
Again, the overall structure of an income statement for a bank doesn’t stray too far from a regular income statement. The top of the income statement is revenue and the bottom is net income.