Banking operations
TEMENOS EDUCATION CENTRE
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e
Objectives
At the end of this course, you will be able to understand the basics of
accounting used in Banking operations like
Accounting entries
Slide 2
Workshop – 1 How much you own?
Slide 3
How much you own - concepts
Opening Cash
Closing Cash
Payments/
Expenses
Receipts /
Income
Debit Credit
Single entry
Heads of Accounts Reconciliation
book keeping
Slide 4
Why to maintain books of accounts
In addition
Which division is giving how much money ?
Who has to give - how much ?
To whom we are paying - how much ?
How was it last year ?
Slide 5
Double entry accounting
Slide 6
Common terminologies
TRANSACTION
Any business activity expressed in terms of money
What a business receives and what it pays
DEBTOR
A person who owes something
Borrower in a Bank
CREDITOR
A person to whom something is owed
Depositor in a Bank
Slide 7
Common terminologies
ACCOUNT
A list of transactions falling under the same description
Each account has a history of changes
Slide 8
Double entry accounting
T account
Slide 10
Workshop – 2 Two fold effect
Analyse the two fold effect of following transaction and write down the
accounting entries you will pass:
Slide 11
Workshop – 2 Solution
Analyse the two fold effect of following transaction and write down the
accounting entries you will pass:
Slide 12
Workshop – 3 Two fold effect
Analyse the two fold effect of following transactions and write down the
accounting entries you will pass:
3. Bank gives USD 15,000 as loan to David Green. It credits the proceeds to
his current account
Slide 13
Workshop – 3 Solution
Slide 14
Workshop – 3 Solution
3. Bank gives USD 15,000 as loan to David Green. It credits the proceeds
to his current account
Slide 15
Workshop – 4 Two fold effect
Analyse the two fold effect of following transactions and write down the
accounting entries you will pass:
4. John Fowler pays USD 7,700 in full settlement of his loan of US$7,000 on
due date of loan
5. John Smith withdraws cash of US$ 1,000 from his Savings Account
Slide 16
Workshop – 4 Solution
Slide 17
Workshop – 4 Solution
5. John Smith withdraws cash of US$ 1,000 from his Savings Account
Slide 18
Workshop – 4 Solution
Slide 19
Summary of transactions …
Slide 20
Presented as Journal ..
Slide 21
And then to Books of Accounts
April 3, 2008
Slide 22
Common terminologies
ASSETS
Properties of a business
LIABILITIES
Amounts due by a business to various persons
Slide 23
Accounting equation
DEBIT CREDIT
=
Increases Assets Increases Liabilities
Liabilities
Assets
Loans Deposits
Investments Borrowings
Cash
Property
Owner’s Equity
Slide 24
Accounting equation
Liability
Assets
Owner’s
Equity
Slide 26
Workshop – 5 Solution
Assets Liabilities
What Bank owns What Bank owes
Furniture worth US $ 50,000 Nothing.
Cash reduced by US $ 50,000
Slide 27
Workshop – 6 Assets and Liabilities
3. Bank gives USD 15,000 as loan to David Green. It credits the proceeds to
his current account
Slide 28
Workshop – 6 Solution
Assets Liabilities
What Bank owns What Bank owes
Slide 29
Workshop – 6 Solution
Assets Liabilities
What Bank owns What Bank owes
Slide 30
Workshop – 7 Assets and Liabilities
Slide 31
Workshop – 7 Solution
4. John Fowler pays USD 7,700 in full settlement of his loan of US$7,000 on
the due date of the loan
Assets Liabilities
What Bank owns What Bank owes
Slide 32
Workshop – 7 Solution
5. John Smith withdraws cash of US$ 1,000 from his Savings Account
Assets Liabilities
What Bank owns What Bank owes
Slide 33
Workshop – 7 Solution
Assets Liabilities
What Bank owns What Bank owes
Cash of US $ 100,000 It has an obligation to pay US $ 100,000 to its
100 share holders. Its share capital has
increased
Slide 34
Common terminologies
INCOME
Revenue earned out of business
EXPENDITURE
Cost of doing business
Slide 35
Double entry accounting
DEBITS CREDITS
What Bank owns and = What Bank owes and
spends earns
Liabilities
Assets
Owner’s Equity
Profit
Expenditure Income
Interest, Salary paid Interest, Commission
received
Slide 36
Double entry accounting
DEBITS CREDITS
What Bank owns and = What Bank owes and
spends earns
Liabilities
Assets
Owner’s Equity
Loss
Expenditure Income
Interest, Salary paid Interest, Commission
received
Slide 37
Double entry - rules
Liabilities
Debit Credit
Assets Decreases Increases
Slide 38
Double entry - Illustration
John Fowler pays USD 7,700 in full settlement of his loan of US$7,000 on
the due date of the loan
Slide 39
Reporting Revenue and Expenses
Slide 40
Workshop – 8 Accrual basis of Accounting
Bank earns USD 700 as interest on loan to John Fowler @ USD 350
per month.
John Fowler pays interest at the end of 2 month loan
What will be the effect of Accrual basis of Accounting for interest?
Slide 41
Workshop – 8 Solution Accrual basis of Accounting
Bank earns USD 700 as interest on loan to John Fowler @ USD 350
per month.
John Fowler pays interest at the end of 2 month loan
Slide 42
From Books of accounts to Trial Balance
Assets
Liabilities
Owner’s Equity
Revenue
Slide 43
From Trial Balance to Chart of Accounts
Other income
Expenses
Slide 44
From Trial Balance to Chart of Accounts
Assets Liabilities
Slide 45
Traditional Classification of accounts
Personal
Accounts relating to amounts given to or taken from Persons
Individuals, Firms, Companies
Real
Accounts relating to tangible accounts
Can be seen or felt - Cash, Furniture
Nominal
Accounts of items which are not tangible
Interest, Salary, Rent, Telephone expense
Slide 46
3 Golden rules
Personal accounts:
Debit the Receiver and
Credit the Giver
Real accounts :
Debit what comes in and
Credit what goes out
Nominal accounts:
Debit expenses / losses and
Credit incomes / gains
Slide 47
Workshop – 9 Re-write books of accounts
3. Bank gives USD 15,000 as loan to David Green. It credits the proceeds to
his current account
4. John Fowler pays USD 7,700 in full settlement of his loan of US$7,000 on
the due date of the loan
5. John Smith withdraws cash of US$ 1,000 from his Savings Account
Slide 48
Workshop – 9 Solution
1) Bank buys furniture for its new office for US$ 50,000
Furniture account and Cash account are Real accounts and the
cardinal Rule for Real accounts is Debit what comes in and Credit what
goes out. In this case, furniture has come in and cash has gone out.
Hence furniture account is debited and cash account is credited.
Slide 49
Workshop – 9 Solution
Slide 50
Workshop – 9 Solution
Slide 51
Workshop – 9 Solution
Slide 52
Workshop – 9 Solution
5) John Smith withdraws cash of US$ 1,000 from his Savings Account
Slide 53
Workshop – 9 Solution
Cash account is a Real account and hence when cash comes in, it is
debited. Share capital is a Personal account and hence the givers are
credited.
Slide 54
Accounting – an information process
Accounting
External Users System
Slide 55
Computerised accounting cycle
No
2. Accounting entries are JOURNAL
produced
Slide 56
Rules for Accounting – GAAP, IASB
Slide 57
Accounting period
Profit/Loss
Contingents
Slide 58
Cash and accrual basis
For the Financial Year ended March For the Financial Year
31, 2008 ended March 31, 2008
Income – Cash received Income for the period even if not yet due
Expenditure – Cash paid Expenditure for the period even if not yet due
Slide 59
Banking related Accounting aspects
Reserves
Slide 60
Profit Vs Cash flow
Balance sheet and Profit and Loss statement show funds flow
Banks need to have projections of Cash movement, in time buckets
Slide 61
Contingents
Contingents
Depends on an uncertain even taking place
Will it happen?
Slide 62
Quiz - 1
A case of a future Asset, a loan, which the Bank may gladly like to
happen as it leads into its regular business of loan.
So, it should only take care of Cash flow
Slide 63
Quiz - 2
4. A Bank has agreed with a customer to Buy GBP 1 million and sell USD
2 million in return, two months after date.
A: In the meanwhile if the market rates for GBP is not 2 USD, will the
Customer come on the right day and give GBP 1 million?
Also a welcome event for the Bank as it would have already planned
counter steps. If only it were not to happen, it may affect plans of the
Bank. Anticipating this, the Bank would have arranged to sell
GBP 1 million to another Customer, on the same delivery date or very
close to that. It would now be put to difficulty on the second front.
Besides cash flow, there is an element of Forex risk here.
Slide 65
Off Balance sheet
Slide 66
Summary
In double entry book keeping, debit and credit entries are passed
simultaneously to balance each other
Slide 67
Summary
Most of the banks follow Accrual basis of accounting for Income and
expense recognition. For minor amounts, they also follow Cash basis
Slide 68