ACCOUNTING SYSTEM IN
CONVENTIONAL BANK
INTRODUCTION TO BANK BALANCE SHEETS
Bank balance sheets report the assets, liabilities, and
bank capital for an individual bank. The balance
sheet identity is:
Assets = Liabilities + Capital(Equity)
INTRODUCTION TO BANK BALANCE SHEETS
• Assets:
•
•
•
•
•
•
Reserves = Vault cash + Bank deposits with central bank
Cash items in process of collection
Deposits at other banks
Securities
Loans
Other assets
• Liabilities:
• Deposits = Checkable deposits + Non transactions deposits
• Bank Borrowings = Loans, discount loans and other type of loans
• Other = Rent, salary, tax and etc.
• Bank Capital (Equity)= Total assets – Total liabilities
BALANCE SHEET OF BANK
Assets
Liabilities
Reserve
9,000 ID
Checkable deposits
24,000 ID
Securities
53,000 ID
Non transactions deposits
122,000 ID
Loans
124,000 ID
Borrowings
40,000
Other assets
14,000 ID
Bank capital
13,000
TOTAL
200,000 ID
TOTAL
200,000 ID
BALANCE SHEET OF ALL COMMERCIAL BANKS
Assets
Reserve
Liabilities
14%
Securities
government and agency
state and local government and
other securities
15
Saving deposits
49
6
Small denomination time
deposit
2
Large-denomination time
deposit
10
Borrowings
17
Bank Capital
11
Total Liabilities
100
Commercial and Industrial
13
Real estate
26
Consumer
8
Interbank
1
Other
9
Total Assets
11%
Non transactions deposits
Loans
Other assets (e.g., physical capital)
Checkable deposits
8
100
BALANCE SHEET OF CENTRAL BANK
Assets
Liabilities
Assets and foreign exchange reserves
Banknotes and coins in the hands of people
Gold reserves
required reserves of banks
Receivables from the public sector
and government bonds
Excess reserve:
A- Banknotes and coins in banks treasury
B- excess reserve of banks in central bank
Debt of banks to the central bank
Public sector deposits in the Central Bank
Other Assets
Foreign Exchange Debts of the Central Bank
Other Liabilities
Capital
TOTAL
A
TOTAL
A
BALANCE SHEET OF CENTRAL BANK
AFTER EDITING
Assets
Liabilities
Net assets and foreign exchange
reserves
Banknotes and coins in the hands of people
Gold reserves
required reserves of banks
Net receivables from the public
sector and government bonds
Excess reserve:
A- Banknotes and coins in banks treasury
B- excess reserve of banks in central bank
Debt of banks to the central bank
Net other Assets
TOTAL
A
TOTAL
A
BANK
BALANCE
SHEET
DEPOSITS
- Assume that a $2,000 cash deposit it made into a current account at Kurdistan Bank,
now assume that the Central bank reserve has set the reserve ratio at 10% .
- Now assume that a second $2,000 cash deposit is made into a checking account at
Kurdistan bank.
- Now assume that a $1,000 cash is made into a checking account at Kurdistan
bank.
Assets
Required reserves - $200
Liabilities
Assets
Demand deposits - $2,000
Loans - $1,800
$2,000
Required reserves - $400
Liabilities
Demand deposits - $4,000
Loans - $3,600
$2,000
Assets
Required reserves - $500
$4,000
Liabilities
Demand deposits - $5,000
Loans - $4,500
$5,000
$5,000
$4,000
BANK
BALANCE
SHEET
WITHDRAWALS
- Assume that the central bank reserve has set the reserve ratio at 10% now assume that
Azadi Bank liabilities equal $5,000 in demand deposits.
- Suppose that a depositor request of a draw of $2,000 from their checking account at
Azadi bank
- Now suppose that a second depositor withdraws $1,000 from their current account at
Azadi Bank.
- Now suppose a third depositor withdraws $1,000 from their current account at Azadi
bank.
Assets
Required reserves - $500
Liabilities
Demand deposits - $5,000
Assets
Required reserves - $200
$5,000
Liabilities
Demand deposits - $2,000
Demand deposits - $3,000
$3,000
Assets
Required reserves - $100
$3,000
Liabilities
Demand deposits - $1,000
Loans - $900
Loans - $1,800
$2,000
Required reserves - $300
Liabilities
Loans - $2,700
Loans - $4,500
$5,000
Assets
$2,000
$1,000
$1,000
BANK
BALANCE
SHEET
EXCESS RESERVES
- Assume that the central bank has set the reserve ratio at 25%, now assume that Harem
bank liabilities equal $8,000 in demand deposits and the assets equal $8,000, $2,000 are
held in required reserves, $4,000 are currently held in outstanding loans, and Harem bank
holds $2,000 in excess reserves.
- Suppose the same depositor of a drawl of $2,000 from their current account at Harem
bank.
Assets
Liabilities
Required reserves - $2,000 Demand deposits - $8,000
Assets
Required reserves - $1,500
Excess reserves - $2,000
Excess reserves - $500
Loans - $4,000
Loans - $4,000
$8,000
$8,000
$6,000
Liabilities
Demand deposits - $6,000
$6,000
TREASURY DIVISION
Treasury division is the most important
division in the bank. It's responsible for all
banks in and out cash (Cash store).
TREASURY DIVISION
Treasury is divided into two sections:
1. Main treasury: were all bank cash are kept. Its responsible for:
• Giving and receiving cash to and from different branches and subsidiary
treasury (beginning and end of day).
• Calculate the main treasury at the end of each day and assess with the
accounting book entry.
• Supplying cash in excess of the bank’s need to the central bank, or
withdrawing the cash that the bank needs from its balance with the central
bank.
2. Subsidiary treasury:
•
Received and paid cash from and to depositor that wants to deposit or
withdraw in or from the bank.
•
Receiving cash from main treasury at the beginning of each day.
•
Delivery of the remaining cash at the end of the working period to the
main treasury.
•
Adjustment of documents and statements which is related to Payments
and Receipts
MAIN TRASURY OPERATION
• Capital deposit
•
•
•
•
Treasury A/c Dr xx
To Capital A/c Cr xx
payment an amount to the subsidiary treasury
Sub-treasury No… A/c Dr xx
Treasury A/c Cr xx
Receipt of amount from subsidiary treasury
Treasury A/c Dr
xx
Sub-treasury No… A/c Cr
Deposit an amount in the Central Bank
Central Bank A/c Dr
xx
Treasury A/c
Cr
xx
Withdrawing cash from the Central Bank
Treasury A/c
Dr
xx
Central Bank A/c Cr
xx
xx
MAIN TRASURY OPERATION
• Pay an amount to bank branches
Branch No… A/c Dr
Treasury A/c
xx
Cr
xx
• Receipt an amount from bank branches
Treasury A/c Dr
Branch No.. A/c
xx
Cr
xx
SUBSIDIARY TREASURY
• In case of receipts (Cash receipt)
Treasury A/c Dr
xx
Current account A/c Cr
Saving account A/c Cr
Fixed account A/c Cr
•
In the case of payment (Cash payment)
Current account A/c Dr
xx
Saving account A/c Dr
xx
Fixed account A/c Dr
xx
Treasury A/c
Cr
xx
xx
xx
xx
OPERATIONS TO ADDRESS THE INCREASE
OR DEFICIT IN THE TREASURY
1. In case of Increase
Treasury A/c Dr
xx
Increase in treasury A/c Cr
xx
❑ But In the event that the reasons for the increase are not discovered, it shall be
transferred at the end of the year to the revenue account with the following entry:
Increase in treasury A/c Dr
xx
revenues A/c Cr
xx
Example:
Assume in the end of day Bank has 10,000 increase?
Treasury A/c Dr
10,000
Increase in treasury A/c Cr
10,000
Assume the reasons of increase not clear and in the end of day
Bank has 70,000 ID increase?
Increase in treasury A/c Dr
70,000
revenues A/c Cr
70,000
OPERATIONS TO ADDRESS THE INCREASE OR DEFICIT
IN THE TREASURY
2. In case of Deficit
▪ When deficit occurs
Deficit in treasury A/c Dr
xx
Treasury A/c Cr
xx
▪ When cashier is responsible
Cashier A/c Dr
xx
Deficit in treasury A/c Cr
xx
Treasury A/c Dr xx
Cashier Cr xx
▪ When cashier is not responsible for the deficit
profits and losses A/c Dr
xx
Deficit A/c Cr
xx
Example:
Assume Azadi Bank after adjustment its documents know it has
deficit equal 100,000 ID?
Deficit in treasury A/c Dr
100,000
Treasury A/c Cr
100,000
If Cashier bears this deficit in the treasury?
Cashier A/c Dr
100,000
Deficit in treasury A/c Cr
100,000
Treasury A/c Dr 100,000
Cashier Cr 100,000
If Cashier is not responsible for this deficit?
profits and losses A/c Dr 100,000
Deficit A/c Cr
100,000
Example:
The client Mohammad deposited $10,000 in cash in the bank and
asked the bank to deposit it in his accounts as follows:
$2,000 in the current account
$4,000 in the Saving account
$4,000 in the fixed account or time account
Solution:
Treasury A/c Dr
10,000
Current account A/c
Saving account A/c
Fixed account A/c
Cr
Cr
Cr
2,000
4,000
4,000
Example:
The client Mohammad deposited $10,000 in cash in the bank and asked the bank to
deposit it in his accounts as follows:
$2,000 in the current account, but bank deposit 5% of current account in Central
Bank
$4,000 in the Saving account
$4,000 in the fixed account or time account
Solving:
1.
Treasury A/c Dr
10,000
Current account A/c Cr
Saving account A/c Cr
Fixed account A/c Cr
2.
Central bank A/c Dr
100
Treasury A/c Cr
100
2,000
4,000
4,000
Example:
1- Kurdistan bank started its business on 1/1/2020 with a capital of 7.000.000 ID distributed as
follow:
- Depositing 2.800.000 ID in central bank.
- Depositing 1.400.000 ID in main treasury.
- Depositing 2.100.000 ID in RT bank .
- Depositing 700.000 ID in Cihan bank.
2- K-Bank Withdraw 500.000 ID from the Central Bank and deposited in the main treasury of
the bank.
3- During the same day, the bank withdraws 700.000 ID from RT bank and deposits it in central
bank.
4- 30.000 ID was paid for the rent of the bank building, and 5.000 ID was the value of
stationery from the sub-fund for payments.
5- Other payments done by the bank
A- 15.000 ID for purchase furniture via check withdrawn on the RT Bank.
B- 20.000 ID for purchase computers via check withdrawn on Cihan Bank.
C- 12.000 ID for purchase Cars via check withdrawn on the RT Bank.
Solving:
1.
Central Bank A/c Dr 2.800.000
Treasury A/c
Dr 1.400.000
RT Bank A/c
Dr 2.100.000
Cihan Bank A/c Dr
700.000
Capital A/c
Cr
7.000.000
2.
Treasury A/c Dr
500.000
Central Bank A/c Cr
500.000
3.
Central Bank A/c Dr
700.000
RT Bank A/c Cr
700.000
4.
Rent of bank building A/c Dr
30.000
stationery A/c
Dr
5.000
Cash payment A/c Cr
35.000
5.
Afurniture A/c
Dr
15.000
RT Bank A/c
Cr
BComputer A/c Dr
20.000
Cihan Bank A/c Cr
20.000
C-
Cars A/c
Dr
120000
RT Bank A/c Cr
120000
15.000
CURRENT ACCOUNT DIVISION
It’s a contract between the bank and its
client, were client can deposit and
withdraw financial instruments in and from
his/her account in any time he/she wishes.
TYPE OF TRANSACTIONS DONE IN
CURRENT ACCOUNT DIVISION
• Transactions of deposits.
Treasury A/c
Dr
xx
Current account A/c Dr
xx
Branches A/c
Dr
xx
Local banks A/c
Dr
xx
Foreign banks A/c
Dr
xx
………………….A/c
Dr
xx
To Current account A/c
Cr
xx
TRANSACTIONS OF DEPOSITS
• Transactions of withdrawals.
Current account A/c
Dr
xx
To
Treasury A/c
Cr
Current account A/c Cr
Branches A/c
Cr
Local banks A/c
Cr
Foreign banks A/c
Cr
………………….A/c
Cr
xx
xx
xx
xx
xx
xx
• conversion process
▪ Proof of account-to-account transfer.
C/A )The customer is requesting a transfer( Dr xx
To C/A (The customer is beneficiary of the transfer) Cr xx
Branches A/c
Cr xx
Local banks A/c
Cr xx
………………….A/c
Cr xx
▪ Proof of account-to-account receipt
Branches A/c
Dr
xx
Local Bank A/c
Dr
xx
To
Current account
Cr
xx
Example:
Assume Azadi Bank transfer an amount from Ahmed’s current account (No:
254657687) account equal 50,000 ID to Ali’s current account (No; 43565768) in the
same Bank.
C/A No: 254657687 Dr 50,000
To A/C No: 43565768 Cr
50,000
Assume Branch No 1 transfer 50,000 ID to Mohammed’s current account in Branche
No 5.
Branches No: 1 Dr
To C/A Cr
50,000
50,000
Q. No. (1):
Here are the following transactions that occurred in Azadi Bank for the fiscal year
2021.
1. Deposits in current accounts amounted to 100,000,000 ID as follows:
• 20 million ID in cash deposits.
• 15 million ID by check in the same branch.
• 23 million ID by check in branches of Azadi Bank.
• 27 million ID by check in other local banks.
• 10 million ID by check in a foreign bank.
• 5 million ID by check in the Financial institution.
2. Withdrawals from current accounts amounted to 10,000,000 ID as follows:
• 3 million ID in cash.
• 2 million ID check drawn on customers' current accounts
• 2.5 million ID check received through bank branches.
• 1.5 million ID check received through local banks.
• 1 million ID check received through Foreign banks.
Solution:
(1)
Treasury
Dr
20,000,000
Current account Dr
15,000,000
Branches
Dr
23,000,000
Local Banks
Dr
27,000,000
Foreign Banks
Dr
10,000,000
Financial Inst.. Dr
5,000,000
To Current account Cr 100,000,000
(2)
Current account Dr
10,000,000
To
Treasury
Cr
3,000,000
Current account Cr
2,000,000
Branches
Cr
2,500,000
Local banks
Cr
1,500,000
Foreign Banks
Cr
1,000,000
CLEARING DIVISION
Normally when bank clients deposit checks withdrawn on other local
banks in their accounts, their bank takes the responsibility of collecting
it on their behalf.
The bank do this kind of job via the clearing room of the central bank,
were all banks representatives gather every day to maintain their
banks rights and responsibilities related to the checks of their clients.
Note: After each clearing room session, the central bank updates all
banks account balances.
Example:
The following are the checks that some banks received from their clients on a date and
that were drawn on other banks. The representative of each bank in the clearing house
on 1/10/2019 took all the necessary steps to settle these checks.
-
Checks received by the Kurdistan Bank from its customers:
No. of check
Amount
drawee bank
220
1000
Cihan Bank
105
900
Cihan Bank
160
600
RT Bank
260
400
RT Bank
1115
800
Zanko Bank
1190
700
Zanko Bank
- Checks received by the Cihan bank from its customers:
No. of check
Amount
drawee bank
3001
1700
Kurdistan Bank
3010
1300
Harem Bank
- Checks received by the RT bank from its customers:
-
No. of check
Amount
drawee bank
2000
3000
Kurdistan Bank
2020
1000
Zanko Bank
Checks received by the Zanko bank from its customers:
No. of check
Amount
drawee bank
5000
1300
Kurdistan Bank
5001
2000
RT Bank
- Checks received by the Harem bank from its customers:
No. of check
Amount
drawee bank
900
400
Kurdistan Bank
920
2000
Cihan Bank
Solution/ Step (1): Preparing a form (voucher) to receive checks for
collection (clearing).
- Checks received by Kurdistan Bank from its customers:
No. of check
Amount
drawee bank
220
1000
Cihan Bank
105
900
Cihan Bank
160
600
RT Bank
260
400
RT Bank
1115
800
Zanko Bank
1190
700
Zanko Bank
Total
4400
Checks received by Cihan Bank from its customers:
No. of check
Amount
drawee bank
3001
1700
Kurdistan Bank
3010
1300
Harem Bank
Total
2000
- Checks received by the RT bank from its customers:
-
No. of check
Amount
drawee bank
2000
3000
Kurdistan Bank
2020
1000
Zanko Bank
Total
4000
Checks received by the Zanko bank from its customers:
No. of check
Amount
drawee bank
5000
1300
Kurdistan Bank
5001
2000
RT Bank
Total
3300
- Checks received by the Harem bank from its customers:
No. of check
Amount
drawee bank
900
400
Kurdistan Bank
920
2000
Cihan Bank
Total
2400
Step 2: Preparing the forms for submitting consignments for clearing:
Kurdistan bank:
List of sending clearing checks drawn on
Cihan bank
Kurdistan bank:
List of sending clearing checks drawn on
RT bank
No. of check
Amount
No. of check
Amount
220
1000
160
600
105
900
260
400
Total
1900
Total
1000
Kurdistan bank:
List of sending clearing checks drawn on
Zanko bank
No. of check
Amount
1115
400
1190
2000
Total
1500
Cihan Bank
List of sending clearing checks drawn on
Kurdistan bank
No. of check
Amount
3001
1700
Cihan Bank:
List of sending clearing checks drawn on
Harem bank
No. of check
Amount
3010
1300
RT Bank:
List of sending clearing checks drawn on
Zanko bank
RT Bank:
List of sending clearing checks drawn on
Kurdistan bank
No. of check
Amount
No. of check
Amount
2020
1000
2000
3000
Zanko Bank
List of sending clearing checks drawn on
Kurdistan bank
Zanko Bank
List of sending clearing checks drawn on
RT bank
No. of check
Amount
No. of check
Amount
5000
1300
5001
2000
Harem Bank
List of sending clearing checks drawn on
Kurdistan bank
Harem Bank
List of sending clearing checks drawn on
Cihan bank
No. of check
Amount
No. of check
Amount
900
400
920
2000
Kurdistan Bank
Clearing Check Submission Form
No.
Checks drawn on banks (to
our account)
2
2
2
1900
1000
1500
Name of Bank
No.
Checks drawn on us (on
our account)
Cihan Bank
RT Bank
Zanko Bank
Harem Bank
1
1
1
1
1700
3000
1300
400
2000 (Balance
on our account)
4400
6400
Cihan Bank
Clearing Check Submission Form
No.
Checks drawn on banks (to
our account)
Name of Bank
No.
Checks drawn on us (on
our account)
1
1
1700
1300
Kurdistan Bank
Harem Bank
2
1
1900
2000
3000
900 (Balance on
our account)
3900
RT Bank
Clearing Check Submission Form
No.
Checks drawn on banks (to
our account)
Name of Bank
No.
Checks drawn on us (on
our account)
1
1
3000
1000
Kurdistan Bank
Zanko Bank
2
1
1000
2000
4000
Balance to our
account (1000)
3000
Zanko Bank
Clearing Check Submission Form
No.
Checks drawn on banks (to
our account)
Name of Bank
No.
Checks drawn on us (on
our account)
1
1
1300
2000
Kurdistan Bank
RT Bank
2
1
1500
1000
3300
Balance to our
account (800)
2500
Harem Bank
Clearing Check Submission Form
No.
Checks drawn on banks (to
our account)
Name of Bank
No.
Checks drawn on us (on
our account)
1
1
400
2000
Kurdistan Bank
Cihan Bank
1
1300
2400
Balance to our
account (1100)
1300
• Accounting entries in the Kurdistan Bank
1. When receiving checks from customer
Checks for collection/clearing Dr
1/10/2019
4400
Depositor of checks for collection/clearing Cr
2. In the end of clearing session
Current account Dr
4400
2/10/2019
6400
Checks for collection/clearing
Cr
4400
Central Bank
Cr
2000
3. After the clearing period has passed
4/10/2019
Depositor of checks for collection/clearing Dr
Current account
4400
Cr
4400
• Accounting entries in the Cihan Bank
1. When receiving checks from customer
Checks for collection/clearing Dr
1/10/2019
3000
Depositor of checks for collection/clearing Cr
2. In the end of clearing session
Current account Dr
3000
2/10/2019
3900
Checks for collection/clearing
Cr
3000
Central Bank
Cr
900
3. After the clearing period has passed
4/10/2019
Depositor of checks for collection/clearing Dr
Current account
3000
Cr
3000
• Accounting entries in the RT Bank
1. When receiving checks from customer
Checks for collection/clearing Dr
1/10/2019
4000
Depositor of checks for collection/clearing Cr
2. In the end of clearing session
2/10/2019
Current account Dr
3000
Central Bank
1000
Dr
4000
Checks for collection/clearing
3. After the clearing period has passed
Cr
4/10/2019
Depositor of checks for collection/clearing Dr
Current account
4000
4000
Cr
4000
• Accounting entries in the Zanko Bank
1. When receiving checks from customer
Checks for collection/clearing Dr
1/10/2019
3300
Depositor of checks for collection/clearing Cr
2. In the end of clearing session
2/10/2019
Current account Dr
2500
Central Bank
800
Dr
3300
Checks for collection/clearing
3. After the clearing period has passed
Cr
4/10/2019
Depositor of checks for collection/clearing Dr
Current account
33000
33000
Cr
3300
• Accounting entries in the Harem Bank
1. When receiving checks from customer
Checks for collection/clearing Dr
1/10/2019
2400
Depositor of checks for collection/clearing Cr
2. In the end of clearing session
2/10/2019
Current account Dr
1300
Central Bank
1100
Dr
2400
Checks for collection/clearing
3. After the clearing period has passed
Cr
4/10/2019
Depositor of checks for collection/clearing Dr
Current account
24000
24000
Cr
2400
Final Statement (Zero Statement)
Name of Bank
Received
checks
Sent Checks
Balance
Kurdistan
Cihan
RT
Zanko
Harem
6400
3900
3000
2500
1300
4400
3000
4000
3300
2400
2000
900
Total
17100
17100
2900
From
For
1000
800
1100
2900
LONG-TERM (FIXED) AND SAVING DEPOSITS DIVISION
It’s a Fixed (long term) cash deposits, deposited by bank clients for fixed periods to gain interest.
It's considered one of the most important recourses for banks to determine its activities.
Accounting cycle of the long-term deposit:
1- The client fill up the long-term deposit form, which is a contract determine the period and
interest rate.
2- The cash might be deposited in cash or from the client current account.
3- The bank charge any fees agreed upon.
4- At the end of the financial period, the bank determines the interest due and allocates it in
long-deposit interest reserve account.
5- Once the long-term deposit date is due, the bank transfers the accumulated interest from
long-deposit interest reserve account to client long-term deposit account.
6- The client can withdraw the long-term deposit + the interest in cash, or it can be transferred
to his current account.
LONG-TERM (FIXED) AND SAVING DEPOSITS DIVISION
Deposit:
Cash A/C
xx
Current account A/C
xx
Branch A/C
xx
Fixed (Long term) & Saving account
xx
Withdrawal:
Fixed (Long term) & Saving account A/C
xx
Cash A/C
xx
Current account A/C
xx
Branch A/C
xx
LONG-TERM (FIXED) AND SAVING DEPOSITS DIVISION
Determining the interest due and allocates it in long-deposit interest
reserve account
Long-term deposit interest exp.A/c
xx
Long-term deposit interest reserve A/C
xx
Income summery A/C
xx
Long-term deposit interest exp.A/c
xx
Transferring the accumulated interest from long-term deposit interest
reserve account to client long-term deposit account
Long-deposit interest reserve A/C
xx
Long-term deposit A/c
xx
Example:
On 1/8/2020 a client deposited 7500 $ as long-term
deposit from his current account. Maturity date is
1/12/2021. Annually interest is 6%.
Prepare: 2020 and 2021 general journal entries
assuming all settlements done via the client current
account.
Solving:
Time of deposit (1/8/2020):
Current accounts A/C
7500
Long-term deposit A/c
7500
End of 2020 (31/12/2020):
Determining the interest due and allocates it in long-deposit interest
reserve account
7500 * 6% * 5/12 = 187.5
Long-term deposit interest exp.A/c
187.5
Long-deposit interest reserve A/C
187.5
Income summery A/C
187.5
Long-term deposit interest exp.A/c
187.5
Solving:
Maturity Date in (1/12/2021):
Determining the interest due and allocates it in long-deposit interest reserve
account
7500 * 6% *11/12 = 412.5
Long-term deposit interest exp.A/c 412.5
Long-deposit interest reserve A/C 412.5
Income summery A/
412.5
Long-term deposit interest exp.A/c
412.5
Transferring the accumulated interest from long-deposit interest reserve account
to client long-term deposit account
Long-deposit interest reserve A/C
600
Long-term deposit A/c
600
Transferring the long-term deposit plus the accumulated interest to client current
account
Long-term deposit A/c
8100
Current accounts A/C
8100
Activity (1):
On 1/6/2015 a client deposited 16000 ID as long-term deposit from his
current account. Deposit period is Five years. Annually interest is 10%.
Prepare: 2015 to due date general journal entries assuming all
settlements done via cash.
Activity (2):
On 1/9/2016 a client deposited 16000 ID as Saving deposit. Deposit
maturity date is 31/12/2017. Annually interest is 15%.
Prepare: 2016 and due payment year general journal entries assuming
depositing settlements done via cash and payment settlement done
via client current account.
COMMERCIAL PAPERS DIVISION
Commercial papers division is one important source of bank
investments opportunities. The commercial paper is a form of
contract between two commercial parties (seller and buyer)
in which buyer promise to pay for goods or services in certain
day.
The bank may play three rolls:
1- Collecting the commercial papers on behalf of its clients.
2- Discounting the commercial papers for its clients.
3- Lending clients (loan) with a guarantee of the commercial papers.
COLLECTING THE COMMERCIAL PAPERS ON BEHALF
OF ITS CLIENTS
The bank works as an agent on behalf of the client to collect the commercial papers on
due date.
Example:
Assume that a client presented commercial papers amounted 35,000 ID to Kurdistan
Bank for collection on due date on his behalf, the bank charged him 65 ID as collection
fees.
Prepare the general journal entries as per the followings:
1- If the bank collected the commercial papers fully on time.
2- If the commercial papers were rejected fully.
3- If 6000 were rejected and the client did not wish to protest.
4- If 6000 were rejected and the client wish to protest, and bank charged 50 ID as
protest fees, and 17 ID as bank protest fees.
Solving:
Time of handling the commercial papers to the bank for collection:
C/P presented for collection Dr
35000
C/P Owners Cr
35000
Current accounts Dr
C/P Collection fess Cr
65
65
1- If the bank collected the commercial papers fully on due date:
Treasury Dr
35000
C/P collected on client behalf Cr
35000
C/P collected on client behalf Dr
Current accounts Cr
35000
C/P Owners Dr
35000
C/P presented for collection Cr
35000
35000
Solving:
2- If the commercial papers were rejected fully:
C/P Owners Dr
35000
C/P presented for collection Cr
35000
3- If 6000 were rejected and the client did not wish to protest:
Treasury Dr
29000
C/P collected on client behalf Cr
29000
C/P collected on client behalf Dr 29000
Current accounts Cr
C/P Owners Dr
29000
C/P presented for collection Cr
29000
29000
Solving:
4- If 6000 were rejected and the client wish to protest, and bank charged 50 ID as
protest fees, and 17 ID as bank protest fees:
Treasury Dr
29000
C/P collected on client behalf Cr
29000
C/P collected on client behalf Dr
29000
Current accounts Cr
C/P Owners Dr
29000
C/P presented for collection Cr
Current accounts Dr
67
Protest fess
Cr
Bank protest fees Cr
29000
29000
50
17
DISCOUNTING THE COMMERCIAL PAPERS FOR ITS
CLIENTS
Some times if the bank client needs the amount of the
commercial paper before the due date, he can ask his bank to
discount it.
In this kind of facilities the bank charge the client for any
agreed fees and discount percentage, and the bank becomes
the owner of the commercial papers, but it will stay client
responsibility if it's rejected.
Example:
Assume on 1/1/2021 a bank agreed to discount commercial papers
amounted 35,000 ID with 6% discount interest and 20 ID collection fees.
Prepare the general journal entries as per the followings:
1- On due date the bank were able to collect 29,000 ID, and charged 50
ID as protest fees.
2- On 3/5/2021 the bank collected the balance.
3- Both clients have current accounts at same bank (Owner of C/P
Account NO. AAA and who is drawn on Account NO. BBB).
Solving:
Time of agreement:
C/P Discounted Dr
35000
C/P Discount Interest Cr
C/P Collection fess
2100
Cr
20
Current accounts (AAA) Cr
32880
Due Date:
Current accounts (BBB) Dr
29000
C/P collected on client behalf Cr
C/P collected on client behalf Dr
C/P Discounted
Current accounts (AAA)
Dr
29000
29000
Cr
29000
6050
C/P Discounted
Cr
6000
Protest fess
Cr
50
Solving:
3/5/2021
Current accounts (BBB) Dr 6000
C/P collected on client behalf
Cr
C/P collected on client behalf Dr
6000
Current accounts (AAA)
Cr
6000
6000
LENDING CLIENTS (LOAN) WITH A GUARANTEE OF THE
COMMERCIAL PAPERS
Some times the bank can lend the client a percentage of the commercial
papers amount and keep those papers as grantee for the loan granted.
Example:
Assume that a bank agreed to grant a loan for a client (70% of his
commercial papers amounted 50,000 ID); the bank charged 260 ID as
collection fees and 200 ID as loan interest.
Prepare the general journal entries as per the followings:
1- If the bank collected the commercial papers fully on time.
2- If 20000 were rejected and client did not wish to protest.
Solving:
Time of agreement:
C/P Loan guarantee Dr
C/P Owners
Loan Dr
50000
Cr
50000
35000
C/P Collection fees Cr
260
Loan interest fees
Cr
200
Current accounts
Cr
34540
Solving:
1- If the bank collected the commercial papers fully on time.
Treasury Dr
50000
C/P collected on client behalf Cr
C/P collected on client behalf
Dr
Loan
50000
50000
Cr
35000
Current accounts Cr
15000
C/P Owners Dr
50000
C/P Loan guarantee Cr
50000
Solving:
2-If 20000 were rejected and client did not wish to protest:
Treasury Dr
30000
C/P collected on client behalf Cr
C/P collected on client behalf Dr
30000
30000
Loan Cr
Current accounts
C/P Owners
Dr
30000
50000
Loan
Cr
Dr
50000
C/P Loan guarantee
50000
Cr
50000
“BANK LOAN”
JOURNAL ENTRIES OF “BANK LOAN”
1. Recording the receipt of securities:
Securities as collateral Dr
xx
Depositors of securities as collateral
Cr
xx
2. Customer received loan by using current account:
Current account Dr
Cash
xx
Cr
xx
• Note: if the customer receive the loan in full without opening current
account, it will be recorded as follows;
Loans Dr
xx
Cash
Cr
xx
JOURNAL ENTRIES OF “BANK LOAN”
3. At the end of each month, the current account owes the value
of the interest due on the debit balance as well as monthly
commissions and expenses (fees):
Current account Dr xx
Credit interest
Cr xx
Expenses (fees) and commission Cr xx
4. At the end of the fiscal year, the credit interest account and
expenses and commission account are closed in the income
summary account:
Credit interest
Dr
xx
Expenses and commission Dr
xx
Income Summary
Cr
xx
JOURNAL ENTRIES OF “BANK LOAN”
5- When the customer repays part or full of the loan:
A) Paying the Loan Drawn & Interest & Commissions by the
customer:
Cash Dr xx
Loans
Cr
or
Current Accounts Cr
xx
xx
B) Reversing (Cancelling) the entry for securities deposited as
collateral for the ratio of the amount:
Depositor of securities as collateral
Securities as collateral
Dr
xx
Cr
xx
Example: The following are some of the operations
carried out by the securities department of a
commercial bank:
A customer submitted to the bank securities of 50,000 to obtain a
loan by guaranteeing these securities, the bank agreed to grant
him a loan of about 80% of the value of the securities, and the
customer requested to open a checking Current account with the
loan amount, and amount of the cash withdrawn was 30,000 and
the interest due was 250 and the commission charged amounted
to 50. On the due date, the customer paid the amount of his loan
withdrawn and received his securities deposited in the bank as
collateral.
Solution:
1. Recording the receipt of securities:
Securities as collateral Dr
50,000
Depositors of securities as collateral
Cr
50,000
2. Customer received loan by using current account:
Current account 30,000
Cash
Cr
30,000
3. The current account of the value of the interest due and
commissions and expenses:
Current account Dr 300
Credit interest
Cr 250
Expenses (fees) and commission Cr 50
4. The credit interest account and expenses and commission
account are closed in the income summary account:
Credit interest
Dr 250
Expenses and commission Dr
50
Income Summary
Cr 300
5. Paying the Loan Drawn & Interest & Commissions by the
customer:
Cash Dr 30,300
Current Accounts Cr
30,300
B) Reversing (Cancelling) the entry for securities deposited as
collateral :
Depositor of securities as collateral
Securities as collateral
Dr
50,000
Cr
50,000