Essential terms you must know while preparing Balance sheet are:
Money at Call and Short Notice. This item appears on the assets side of a Bank Balance Sheet and represents temporary loans to Bill Brokers, Stock Brokers and other banks. If the loan is given for one day, it is called ‘money at call’ and if the loan cannot be called back on demand and will require at least a notice of three days for calling back, it is called ‘money at short notice’. It also includes deposits repayable within 10 days or less than 15 days notice lent in the inter bank call money market. The rate of interest on which money is lent fluctuates every day, sometimes very sharply (more than 30%),
depending on the demand and supply of money.
Advances appear on the assets side as fourth head and include loans, cash credits, bank overdrafts and bills discounted and purchased. Banks generally advance money to their customers in the form of loans, cash credits, overdrafts and purchasing and discounting of bills. Provisions in respect of doubtful advances are deducted from advances to extent necessary and the excess provisions for doubtful debts is included under “other liabilities and provisions”.
(i) Cash Credit. It is an arrangement by which the customer is granted the right to borrow money from time to lime upto a certain limit. Cash credit is usually given on hypothecation or pledge of stock. The bank usually charges a higher bank interest on the actual amount withdrawn than that charged on loan because the bank has to keep the amount allowed as cash credit always ready under the fear that money allowed may be demanded at any time. Further, in case of cash credit arrangement, the customer is required to pay a minimum interest whether the customer draws any amount or not.
(ii) Overdraft. This facility is available to a customer who operates a current account with the bank. This facility is granted to customers who have high goodwill and name for honest dealings. In case of bank overdraft, customer is permitted to overdraw, money upto a certain level. The facility of overdraft is beneficial lo the customer as he has to pay interest only upon the sum overdrawn by him and not upon the maximum limit of the overdraft.
(iii) Loan. Loan is advance of a fixed amount to a customer to be withdrawn in lump sum by him. Interest is charged on the total amount of the loan agreed to be paid to a customer whether he uses the full amount of the loan or not. So, customers prefer to take cash credit and pay interest at a little higher rate as they find it inconvenient to use the whole amount of the loan immediately.
(iv) Discounting of Bills. Discounting of a bill means making the payment of the bill before the maturity date of the bill. While making payment of the bill, the bank deducts discount for the unexpired period for the amount of the bill discounted. The bank keeps the bill with it till the maturity date and gets its payment for the customer on the due date.
(v) Purchasing and Discounting of Bills. The bank may purchase or discount clean or documentary bills at the current rate of interest.
Clean Bills. These are the bills to which no documents such as bill of lading, insurance policy etc. are attached.
Documentary Bills. These bills are supported by documents such as bills of lading, insurance policy etc. These bills are secured as in case of non-payment of the bill, the bank can attach the goods.
Bills for Collection. These are drafts and bills drawn by sellers of goods on the purchasers of goods and sent to the bank for collection against delivery documents (i.e. railway receipts, truck receipts, bill of lading). The bank hands over the documents authorizing the delivery of the goods to the borrower only after the collection of the amount of the bill. If some bills are left uncollected at the end of the year, they are shown in the summary version only. These are not shown in any schedule.
Acceptances. Endorsements and other Obligations. A bank can accommodate its customers by accepting and endorsing bills on their behalf. This is usually done in the case of foreign bills to facilitate negotiations and foreign business dealings. In such cases, the bank is liable towards third parties to whom bills are given or endorsed guarantee of payment is given in case of non-payment of the promised amount. On the other hand, customers are liable to the bank for such claims. The bank enters such bills in the Bills Accepted Register. Outstanding amount of acceptances, endorsements and other obligations at the end of the year has to be shown as contingent liabilities in Schedule 12 on liabilities side of the Balance Sheet.
Bills Payable . These represent bank drafts, telegraphic transfers, traveller cheques, mail transfer payable, pay slips, bankers cheques to the miscellaneous items which are issued by the bank but remained uncashed up to the date of the preparation of the final accounts.
Inter office Adjustments. A bank having several branches will receive periodical statements from them regarding the inter branch transactions. It is possible that some entries may remain unadjusted in the head office of the bank at the close of the financial year. Such entries are recorded in the Balance Sheet under the sub-heading ‘Branch Adjustments’ and may appear on the assets side under the heading ‘Other Assets’ if it has a debit balance and on the liabilities side under the heading ‘Other Liabilities’ if it has a credit balance.
Non-banking Assets. A banking company is not allowed to deal directly or indirectly in the purchase or sale or barter of goods except in connection with its legitimate banking business. But a bank can always lend against the security of the assets. The bank may have lo take possession of the asset given as security if the loanee fails to repay the loans. In that case, the asset acquired in satisfaction of the claim of the bank will be shown as an asset in the Balance Sheet under the heading ‘Other Fixed Assets’. Such assets acquired should be disposed of within seven years as a banking company is not allowed to hold such assets for any period exceeding seven years from the date of their acquisition. Profit or loss on sale of such assets is required to be shown separately in the Profit and Loss Account of the Bank.
Rebate on Bills Discounted or Unexpired Discounts. This item is like interest received in advance and represents unearned discounts for those bills which will mature after the closing of the financial accounts.