In the following pages the accounts will be briefly explained without much reference to the bookkeeping involved, the aim being to set forth their character in as simple and direct a manner as possible. In another chapter the bookkeeping in this connection will be explained.
In most banks there are at least two large divisions of loans, that is, demand and time loans. Demand loans are those payable on demand or call, and time loans are those having a definite maturity date. Loans are always evidenced by notes, or promises on the part of the borrower to repay the bank for credit given. Loans are assets of the bank. Each new loan increases this asset, and every payment of a loan decreases it. These items will be shown in entry form in a subsequent chapter.
This item likewise is an asset of the bank, and represents the total of notes which the bank has at any time under discount. The bank has either extended credit, or paid out funds for these notes. When new discounts are made this asset called "bills discounted" increases. When the discounted notes are paid the account decreases.
Sometimes for one reason or another notes are not paid on their maturity dates. This may be because funds remitted for them are not received in time. The result is overdue or "past due paper." This account, therefore, should show at all times the amount of overdue but good loans and discounts which the bank is carrying. The student should not be confused by such loans as have become worthless; these are handled through profit and loss, or through a contingency reserve account, as will be explained. Past due paper should be regarded as an asset of the bank like the two foregoing items. An increase in such paper causes an increase in the account. Conversely, a payment of such paper causes a decrease.
This is an asset account representing investments in all forms of United States securities, including liberty bonds and certificates of indebtedness. As implied by the title, these are securities which are owned outright and which have not been pledged or deposited as security for any purpose whatsoever. As additional investments or purchases are made, the balance of this account increases. Sales of the securities, or other disposition, cause decreases in the account.
This item of assets represents a portion of the bank's U. S. bonds which have been sent to the United States Treasurer as security for an equal amount of circulating notes which the bank has received from Washington, and which are outstanding as shown by the item "circulating notes outstanding" among the credit balances. The deposit of these securities makes doubly sure the redemption on demand of the circulating notes.
This is an asset of the bank representing securities pledged by the bank under the law for postal savings deposits left with the bank.
This account shows the total of all other investments of the bank; that is, other than United States securities. In it would be included such items as railroad and industrial bonds, and the issues of foreign governments. Like account No. 5 the balance of this item increases as new investments are made, and is decreased by sales.
These are assets of the bank, but assets representing bonds pledged to secure funds of the United States Government on deposit with the bank. The phrase "other bonds" means bonds other than those of the United States Government.
All banks which are members of the Federal Reserve System are obliged to subscribe to the extent of 6% of their capital and surplus in stock of the Federal Reserve bank of their district. Only 50% of this subscription has been called by the Federal Reserve Board. This obviously is an asset item, an item owned by the bank.
This figure represents the legal reserve deposited with the Federal Reserve bank of the home district. The amount required by law depends upon the group in which the member bank is located. The percentage has also varied for each of the groups from time to time. (In the trial balance, it is assumed that the bank in question is located in a reserve city.) Of course, banks not members of the Federal Reserve System are not concerned with this account.
Cash is the bank's most liquid asset, and its figures show as at the close of each day the amount of currency, coin, and gold held in the bank's vaults. Incoming cash, of course, increases this figure; all shipments and payments of cash decrease it.
These are similar to the foregoing (12) but are drawn on non-member clearing-house banks. They are usually collected on the following day by messengers of the bank.
This is an asset account. Some checks which have been cashed or for which credit has been given may be found to be irregular so that they cannot be collected on the day received; such are items with missing indorsements, insufficient fund items and those on which figures disagree with wording. These may be carried in cash items unless they are obviously worthless. Other common cash items are those such as expense tickets for which cash has been paid out but which have not as yet been charged to the expense account, and bond coupons for which credit has been given and which are due and collectible. These should not really be carried in cash items; they should be charged off promptly. It is desirable that cash items be turned over each day; that is, that no item remain uncollected more than one day in cash items.