Basic Bank Accounts

BANK ACCOUNTS

Functions of Bank

1.       Borrowing and lending money.

2.       Accepts deposits.

3.       Offering financial advice

4.       Agency services e.g. stock broker.

5.       Foreign exchange.

6.       Fund management e.g. pension funds.

7.       Custodian services e.g. valuable items like certificates, property titles.

Financial statements

1.       IS

      Incomes                                                                                         Sh.

Interest income

-          On loans and advances                                                  XX

-          On treasury bills                                                               XX

-          Other interests                                                                                 XX

Interest expenses

-          On borrowings                                                                  (XX)

-          Other interest expenses                                                              (XX)

Net interest income                                                       XX

Other incomes

-          Investment income                                                        XX

-          Commissions                                                                     XX

-          Fees for services                                                              XX

Total incomes                                                                    XX

Other expenses

-          Administration expenses                                             (XX)

-          Provisions                                                                           (XX)

-          Depreciation                                                                      (XX)

-          Profit                                                                                        XX

2.       Statement of Financial Position

Assets

Arranged in order of liquidity starting with the most liquid and end with the less liquid.

e.g.

-  Loans and advances to customers

- Bank overdraft

- Other assets

Liabilities

-          Customer deposits e.g. Fixed deposits, current A/c deposits, savings deposit.

Definition of terms

1.      Cash credit

-          In some cases the bank may enter into an arrangement with its customers to reserve a specific amount of money for that particular customer such that the customer can withdraw anytime. The bank will charge interest based on the actual amount withdrawn and also charge a small fee for maintaining the reserve for the customer.

2.      Overdraft

-          This is an asset to the bank. It’s a facility given to bank customers to allow them overdraw their a/c up to a certain limit. The bank will charge interest on the actual amount withdrawn.

3.      Discounting of bills of exchange

-          Are assets to the bank. Discounting charges are incomes.

-          Rebate on bills discounted are liabilities- unearned discounting charges.

4.      Advances

-          Includes loans, overdrafts or any money advanced by the bank to its customers. It’s an asset to the bank.

5.      Customer deposits

-          May be in form of fixed, current or savings deposit. They are liabilities to the bank.

6.      Bills for collection

-          A bank may act as an agent and holds bills of exchange on behalf of its customers for collection. On maturity of the bill the bank will collect the money on behalf of the customer.

-          This item will appear as an asset as well as a liability in the P+L because, the bank will collect the cash from the drawee therefore an asset and also the bank is liable to its customer for the same amount of cash, therefore a liability.

-          This item is shown as an off balance sheet i.e. it’s shown in the notes to the a/c.

7.      Liabilities for acceptances, endorsements and guarantees on behalf of customers.

-          Appears as an asset and a liability to the bank therefore shown as an off balance sheet item in the notes.

8.      Money at call and short notice

-          It’s an asset to the bank. Refers to short term lending especially to other banks. E.g. overnight lending.

-          When the money is payable within a single day it is referred to as money at call.

-          When it requires at least a short notice to be paid it is known as money at short notice.