Undivided Profits (27)

Another capital liability is undivided profits which shows the more recently accumulated earnings of the bank. Periodically, usually on June 30 and December 31, banks close out their profits and losses, carrying the excess profit or loss to the undivided profits account. Additions to surplus are made for the most part from undivided profits, and dividends are declared therefrom.

Domestic Exchange (28)

This is distinctly different from the credit balances previously explained. It is a gain, or profit item, and not a liability. It represents the excess of exchange charges which the bank has made on the collection of out-of-town items as against the amount paid by it for the same service. Periodically the balance of this item goes through a clearing account called "profit and loss" to the undivided profits account. The latter is thus increased, and the balance of the domestic exchange account becomes zero. That is what is meant by closing a profit or a loss account.

Commissions Collected (29)

It will be remembered that credit balances are either liabilities or earnings. The balance of this account is an accumulated earning, namely the sum of miscellaneous commissions which have been collected since the last date of closing. Commissions entered in this account would be those such as service charges made by the bank for securities sold for customers, and commission for checks drawn on city bank correspondents sold to customers.

Interest On Loans (30)

This is another earning account, showing the interest earnings on loans made by the bank since the account was last closed out.

Discount (31)

Discount is an earning, gain, or profit account, and not a liability. It shows the amount of discount collected on notes which the bank has discounted. Discount, it should be remembered, is interest collected in advance, or at the time an extension of credit is made, rather than at the maturity date of an obligation.

Interest On Investments (32)

This is obviously an earning account. To this account is credited the proceeds of all coupons and all other interest earned on the bank's investments. As with other earning accounts, its balance is periodically transferred through profit and loss to the undivided profits account. The profit and loss account is used merely for closing or clearing purposes so as to show at the end of each six months, or other earning period, the net profit or loss. Illustrations of the closing process appear in a subsequent chapter.

Bond Profits (33)

This is an earning account showing the profits made in bond purchases and sales aside from interest. In order that profit may be made, one must, of course, sell at a higher rate than he buys. !

Reserve For Taxes (34)

As the title indicates, this item is an amount reserved for the payment of taxes. This is in keeping with the sound policy of providing in advance for an expenditure which it is known will be made eventually.

Reserve For Depreciation On Building (35)

This item represents the offset to expense charges for depreciation on building. As in the case of the tax reserve the establishment of this reserve means that undivided profits is less by just the amount of this reserve. Information as to bookkeeping with respect to this reserve is given in another chapter.

Circulating Notes Outstanding (36)

This was explained in connection with items Nos. 5, 15 and 19 among the debits. It represents in reality the total of the bank's notes carried in the vaults, and those outstanding. The distinct difference between this account and the earning accounts previously explained should here be noted. This account is not in any sense affected by the periodic closing of profit and loss accounts for it has nothing to do with them, nor should there be any confusion arising from the small interest earning on bonds which are pledged in Washington as collateral for these notes. That is another matter.

Due To Depositors (37)

This is a liability account representing the amount due on demand to the depositors of the bank, including (a) banks and bankers, and (b) individuals, firms and corporations. Deposits increase the figure; checks drawn by depositors against the bank decrease it.

Certified Checks Outstanding (38)

This is a liability account which shows the amount of customers' checks certified by the bank and outstanding. By certifying a check a bank gives notice that it has funds to pay the check on presentation. Certifying a check at request of the holder makes it no longer the obligation of the customer who drew, but in fact the obligation of the bank instead.

Cashier's Checks Outstanding (39)

This is a liability account. Obviously it has nothing directly to do with profit and loss and represents as at the close of each day the amount of outstanding checks issued by the bank largely in payment of its own obligations.

Demand Certificates Of Deposit (40)

This shows the liability of the bank on account of certificates of deposit which are issued payable on demand and under thirty days. New certificates issued increase the balance. Payments by the bank against certificates decrease it.

Dividends Payable (41)

Dividends payable is a liability account showing the amount of dividends declared and not yet paid. Each dividend paid reduces the amount of the balance.

Time Certificates Of Deposit (42)

This item is similar to item 40, excepting that time certificates have definite maturity dates of thirty days and over.

Time Deposits -(43)

By Federal Reserve regulations those deposits which require thirty days or more notice before payment are classified as time deposits. Their volume varies greatly among banks; for the most part they are low in city banks and proportionately high in country banks.

Postal Savings Deposits (44)

This account shows the liability of the bank to the United States Government through the trustees of the Postal Savings System. It will be remembered that the bank is required to deposit collateral as security for these deposits. Reference should be made to item No. 6 among the debits in the trial balance which has already been shown.

Overs And Shorts (45)

This account is of a mixed character, either a deficiency of debit balances called a short, or a deficiency in credits called an over. The appearance of the overs and shorts account among the liabilities here implies an excess credit balance signifying that the overs have exceeded the shorts. Good bookkeeping requires that a detailed supporting record be kept of all overs and shorts which may arise so that when the differences are found liquidating entries may be made properly. On the other hand, with good bookkeeping, differences should seldom arise.