Accounts of Banking Companies | Advanced Corporate Accounting - B Com PDF Download

 Page 1


 
 
ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT 
 
Structure 
 
 Objectives 
 Introduction 
 Minimum Capital & Reserve 
 Books of Accounts 
 Some Important Terms 
 P& L Account and Balance Sheet of Banking Companies 
 Let Us Sum Up 
 Key Words 
 Some Useful Books 
 Answer to Check Your Progress 
 Terminal Questions 
 
 OBJECTIVES 
 
After studying this unit, you will be to: 
? Prepare the Books of accounts of  banking companies; 
? Discuss the provisions pertaining to accounting of banking companies; 
? Prepare the  P&L account of  banking companies; 
? Prepare the balance sheet of  bank companies 
 
 
 INTRODUCTION 
 
The banking business in our country is regulated through the Banking Regulation Act, 1949. The 
banking companies are also subject to the Companies act 2013. The nationalized banks are also 
covered by the Banking Regulation Act except in regard to appointment of directors and disposal 
of profits. The act is not applicable to primary agricultural society, cooperative land mortgage 
bank and other cooperative society but few exceptions are given in Part V of the act. The 
banking company means a company doing the banking business. Commonly, the banking means 
accepting the deposits and giving the loans. In addition to this, there is a list of activities given in 
the act in which a banking company may get involved. But trading in goods or immovable 
Page 2


 
 
ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT 
 
Structure 
 
 Objectives 
 Introduction 
 Minimum Capital & Reserve 
 Books of Accounts 
 Some Important Terms 
 P& L Account and Balance Sheet of Banking Companies 
 Let Us Sum Up 
 Key Words 
 Some Useful Books 
 Answer to Check Your Progress 
 Terminal Questions 
 
 OBJECTIVES 
 
After studying this unit, you will be to: 
? Prepare the Books of accounts of  banking companies; 
? Discuss the provisions pertaining to accounting of banking companies; 
? Prepare the  P&L account of  banking companies; 
? Prepare the balance sheet of  bank companies 
 
 
 INTRODUCTION 
 
The banking business in our country is regulated through the Banking Regulation Act, 1949. The 
banking companies are also subject to the Companies act 2013. The nationalized banks are also 
covered by the Banking Regulation Act except in regard to appointment of directors and disposal 
of profits. The act is not applicable to primary agricultural society, cooperative land mortgage 
bank and other cooperative society but few exceptions are given in Part V of the act. The 
banking company means a company doing the banking business. Commonly, the banking means 
accepting the deposits and giving the loans. In addition to this, there is a list of activities given in 
the act in which a banking company may get involved. But trading in goods or immovable 
 
 
property is prohibited for a banking company. No banking company is allowed to deal in goods 
or land and property business. 
 
 MINIMUM CAPITAL & RESERVE 
The section 11 of the act lays down the following minimum limit of paid capital and reserves: 
 
Minimum Paid-up Capital & Reserves for Banks 
                                                                                                                             ? 
  (I) Banks Incorporated in India Paid-up Capital 
& Total Reserves 
(A) 
 
 
 
 
 
 
 
(B) 
(i) 
 
 
(ii) 
 
 
 
 
(i) 
 
 
 
(ii) 
 
 
 
 
 
(i) 
 
(ii) 
A banking company incorporated in India having business 
offices in more than one states 
(Except Mumbai and Kolkata) 
A banking company incorporated in India having business 
offices in more than one states and having business offices 
in Mumbai or Kolkata or both 
If all business offices of a banking company are in the same 
states and among them : 
Any office is in Mumbai or Kolkata 
(for every business office situated at a place other than 
Mumbai or Kolkata, additional capital of 25,000 should be 
there limited to the maximum of 10 lakhs) 
If business office is in the state not in Mumbai or Kolkata  
(For every additional office in the same district, 10,000 and 
for every office situated in other districts, 25,000 but paid-
up capital and reserves of such bank need not be more than 
5 lakhs) 
(II) Bank Incorporated Outside India 
If they do not have any business office in Mumbai or 
Kolkata. 
If they have business office in Mumbai or Kolkata or in 
both. 
 
 
5 lakhs 
 
10 lakhs  
 
 
 
 
 
 
5 lakhs 
 
 
1 lakh 
 
 
 
15 lakhs  
 
20 lakhs 
 
Banking companies carrying on business in India must see to it that: 
 (a) the subscribed capital is not less than half of the authorized capitals 
 (b) the paid up capital is not less than half of the subscribed capital and 
 (c) the capital of the company consists of only or ordinary or equity shares 
Further, the underwriting commission, or brokerage or discount on shares issued by a banking 
company cannot exceed 2.5 per cent of the paid up value of the shares. A charge on unpaid 
Page 3


 
 
ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT 
 
Structure 
 
 Objectives 
 Introduction 
 Minimum Capital & Reserve 
 Books of Accounts 
 Some Important Terms 
 P& L Account and Balance Sheet of Banking Companies 
 Let Us Sum Up 
 Key Words 
 Some Useful Books 
 Answer to Check Your Progress 
 Terminal Questions 
 
 OBJECTIVES 
 
After studying this unit, you will be to: 
? Prepare the Books of accounts of  banking companies; 
? Discuss the provisions pertaining to accounting of banking companies; 
? Prepare the  P&L account of  banking companies; 
? Prepare the balance sheet of  bank companies 
 
 
 INTRODUCTION 
 
The banking business in our country is regulated through the Banking Regulation Act, 1949. The 
banking companies are also subject to the Companies act 2013. The nationalized banks are also 
covered by the Banking Regulation Act except in regard to appointment of directors and disposal 
of profits. The act is not applicable to primary agricultural society, cooperative land mortgage 
bank and other cooperative society but few exceptions are given in Part V of the act. The 
banking company means a company doing the banking business. Commonly, the banking means 
accepting the deposits and giving the loans. In addition to this, there is a list of activities given in 
the act in which a banking company may get involved. But trading in goods or immovable 
 
 
property is prohibited for a banking company. No banking company is allowed to deal in goods 
or land and property business. 
 
 MINIMUM CAPITAL & RESERVE 
The section 11 of the act lays down the following minimum limit of paid capital and reserves: 
 
Minimum Paid-up Capital & Reserves for Banks 
                                                                                                                             ? 
  (I) Banks Incorporated in India Paid-up Capital 
& Total Reserves 
(A) 
 
 
 
 
 
 
 
(B) 
(i) 
 
 
(ii) 
 
 
 
 
(i) 
 
 
 
(ii) 
 
 
 
 
 
(i) 
 
(ii) 
A banking company incorporated in India having business 
offices in more than one states 
(Except Mumbai and Kolkata) 
A banking company incorporated in India having business 
offices in more than one states and having business offices 
in Mumbai or Kolkata or both 
If all business offices of a banking company are in the same 
states and among them : 
Any office is in Mumbai or Kolkata 
(for every business office situated at a place other than 
Mumbai or Kolkata, additional capital of 25,000 should be 
there limited to the maximum of 10 lakhs) 
If business office is in the state not in Mumbai or Kolkata  
(For every additional office in the same district, 10,000 and 
for every office situated in other districts, 25,000 but paid-
up capital and reserves of such bank need not be more than 
5 lakhs) 
(II) Bank Incorporated Outside India 
If they do not have any business office in Mumbai or 
Kolkata. 
If they have business office in Mumbai or Kolkata or in 
both. 
 
 
5 lakhs 
 
10 lakhs  
 
 
 
 
 
 
5 lakhs 
 
 
1 lakh 
 
 
 
15 lakhs  
 
20 lakhs 
 
Banking companies carrying on business in India must see to it that: 
 (a) the subscribed capital is not less than half of the authorized capitals 
 (b) the paid up capital is not less than half of the subscribed capital and 
 (c) the capital of the company consists of only or ordinary or equity shares 
Further, the underwriting commission, or brokerage or discount on shares issued by a banking 
company cannot exceed 2.5 per cent of the paid up value of the shares. A charge on unpaid 
 
 
capital cannot be created. No dividend can be declared unless expenses not represented by 
tangible assets have been completely written off. 
 
 BOOKS OF ACCOUNTS 
 
The banks maintain some books, ledgers and registers for accounting and record keeping of the 
business transactions. The precise description of them is given hereunder: 
Cash Book  
This book gives the summary of the receiving cashier’s counter cash book and paying cashier’s 
counter cash book. The receipt counter keeps the details of each transaction like – serial number, 
depositor’s name and amount received. Similarly, the payment counter keeps the details of each 
payment like- serial number, payee’s name, amount paid, number of token. The record of the 
cash book must tally with the sum total of the counters cash books.  
Cash Balance 
The cash balance at the close of the day is written in the book which is duly signed by the cashier 
and the manager. 
Day Book 
The day book is written by the cashier or accountant. It records day-to-day transactions relating 
to cash transfers and clearing etc. Its balancing is done on daily basis.  
Current Account Ledger 
It records the transactions of those customers who open current account. Generally, the bank 
does not pay interest on the balance of this account but a nominal charge is taken by the bank for 
rendering the services.  
Savings Bank Ledger  
It records the transactions of those customers who open savings account in the bank. The detailed 
description of the customer viz. name, address, occupation is recorded with an account number.  
If there are many savings account ledgers, they are to be serially numbered. 
Fixed Deposit Ledger 
It contains transactions of those customers who have deposited their money into the bank for a 
fixed period. Generally, at the top of the account, depositor’s name and address, rate of interest, 
period of deposit, the amount so deposited are to be recorded. 
 
Page 4


 
 
ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT 
 
Structure 
 
 Objectives 
 Introduction 
 Minimum Capital & Reserve 
 Books of Accounts 
 Some Important Terms 
 P& L Account and Balance Sheet of Banking Companies 
 Let Us Sum Up 
 Key Words 
 Some Useful Books 
 Answer to Check Your Progress 
 Terminal Questions 
 
 OBJECTIVES 
 
After studying this unit, you will be to: 
? Prepare the Books of accounts of  banking companies; 
? Discuss the provisions pertaining to accounting of banking companies; 
? Prepare the  P&L account of  banking companies; 
? Prepare the balance sheet of  bank companies 
 
 
 INTRODUCTION 
 
The banking business in our country is regulated through the Banking Regulation Act, 1949. The 
banking companies are also subject to the Companies act 2013. The nationalized banks are also 
covered by the Banking Regulation Act except in regard to appointment of directors and disposal 
of profits. The act is not applicable to primary agricultural society, cooperative land mortgage 
bank and other cooperative society but few exceptions are given in Part V of the act. The 
banking company means a company doing the banking business. Commonly, the banking means 
accepting the deposits and giving the loans. In addition to this, there is a list of activities given in 
the act in which a banking company may get involved. But trading in goods or immovable 
 
 
property is prohibited for a banking company. No banking company is allowed to deal in goods 
or land and property business. 
 
 MINIMUM CAPITAL & RESERVE 
The section 11 of the act lays down the following minimum limit of paid capital and reserves: 
 
Minimum Paid-up Capital & Reserves for Banks 
                                                                                                                             ? 
  (I) Banks Incorporated in India Paid-up Capital 
& Total Reserves 
(A) 
 
 
 
 
 
 
 
(B) 
(i) 
 
 
(ii) 
 
 
 
 
(i) 
 
 
 
(ii) 
 
 
 
 
 
(i) 
 
(ii) 
A banking company incorporated in India having business 
offices in more than one states 
(Except Mumbai and Kolkata) 
A banking company incorporated in India having business 
offices in more than one states and having business offices 
in Mumbai or Kolkata or both 
If all business offices of a banking company are in the same 
states and among them : 
Any office is in Mumbai or Kolkata 
(for every business office situated at a place other than 
Mumbai or Kolkata, additional capital of 25,000 should be 
there limited to the maximum of 10 lakhs) 
If business office is in the state not in Mumbai or Kolkata  
(For every additional office in the same district, 10,000 and 
for every office situated in other districts, 25,000 but paid-
up capital and reserves of such bank need not be more than 
5 lakhs) 
(II) Bank Incorporated Outside India 
If they do not have any business office in Mumbai or 
Kolkata. 
If they have business office in Mumbai or Kolkata or in 
both. 
 
 
5 lakhs 
 
10 lakhs  
 
 
 
 
 
 
5 lakhs 
 
 
1 lakh 
 
 
 
15 lakhs  
 
20 lakhs 
 
Banking companies carrying on business in India must see to it that: 
 (a) the subscribed capital is not less than half of the authorized capitals 
 (b) the paid up capital is not less than half of the subscribed capital and 
 (c) the capital of the company consists of only or ordinary or equity shares 
Further, the underwriting commission, or brokerage or discount on shares issued by a banking 
company cannot exceed 2.5 per cent of the paid up value of the shares. A charge on unpaid 
 
 
capital cannot be created. No dividend can be declared unless expenses not represented by 
tangible assets have been completely written off. 
 
 BOOKS OF ACCOUNTS 
 
The banks maintain some books, ledgers and registers for accounting and record keeping of the 
business transactions. The precise description of them is given hereunder: 
Cash Book  
This book gives the summary of the receiving cashier’s counter cash book and paying cashier’s 
counter cash book. The receipt counter keeps the details of each transaction like – serial number, 
depositor’s name and amount received. Similarly, the payment counter keeps the details of each 
payment like- serial number, payee’s name, amount paid, number of token. The record of the 
cash book must tally with the sum total of the counters cash books.  
Cash Balance 
The cash balance at the close of the day is written in the book which is duly signed by the cashier 
and the manager. 
Day Book 
The day book is written by the cashier or accountant. It records day-to-day transactions relating 
to cash transfers and clearing etc. Its balancing is done on daily basis.  
Current Account Ledger 
It records the transactions of those customers who open current account. Generally, the bank 
does not pay interest on the balance of this account but a nominal charge is taken by the bank for 
rendering the services.  
Savings Bank Ledger  
It records the transactions of those customers who open savings account in the bank. The detailed 
description of the customer viz. name, address, occupation is recorded with an account number.  
If there are many savings account ledgers, they are to be serially numbered. 
Fixed Deposit Ledger 
It contains transactions of those customers who have deposited their money into the bank for a 
fixed period. Generally, at the top of the account, depositor’s name and address, rate of interest, 
period of deposit, the amount so deposited are to be recorded. 
 
 
 
General Ledger 
It is actually the key ledger of the accounting system of a bank. It contains the total amount in 
respect of all current accounts, total savings accounts, total loan accounts, total bills payable 
account, total expenses and total revenue accounts. Each ledger is kept under self balancing 
system. A trial balance can easily be prepared which helps to prepare the final account as well. 
Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, 
investment ledger may also be prepared. 
Registers 
In addition to the books and ledgers, few registers are maintained in a bank. The main registers 
are as under: 
a) Bills for collection Register 
b) Securities Register 
c) Document Register 
d) Standing Order Register 
e) Cheques Dishonour Register 
f) Draft Issue Register 
g) Draft Payable Register 
h) D.D. Register 
i) Foreign Letters of Credit Register 
 
 
 SOME IMPORTANT TERMS 
Some important terms particularly related to the accounting of a banking company are discussed 
hereunder: 
Statutory Reserve 
According to section 17 of the Banking Regulation Act, it is obligation for a banking company 
operating in India (including foreign banks) to create a reserve fund and transfer to it at least 25 
per cent of its profit as disclosed in profit & loss account before any dividend is declared. Such 
transfer of profits to reserve fund should be continued even after the aggregate amount of reserve 
fund exceeds its paid up capital. This reserve is called Statutory Reserve. It is to be written in 
liabilities side of the balance sheet under the head ‘Reserve & Surplus’. 
 
Page 5


 
 
ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT 
 
Structure 
 
 Objectives 
 Introduction 
 Minimum Capital & Reserve 
 Books of Accounts 
 Some Important Terms 
 P& L Account and Balance Sheet of Banking Companies 
 Let Us Sum Up 
 Key Words 
 Some Useful Books 
 Answer to Check Your Progress 
 Terminal Questions 
 
 OBJECTIVES 
 
After studying this unit, you will be to: 
? Prepare the Books of accounts of  banking companies; 
? Discuss the provisions pertaining to accounting of banking companies; 
? Prepare the  P&L account of  banking companies; 
? Prepare the balance sheet of  bank companies 
 
 
 INTRODUCTION 
 
The banking business in our country is regulated through the Banking Regulation Act, 1949. The 
banking companies are also subject to the Companies act 2013. The nationalized banks are also 
covered by the Banking Regulation Act except in regard to appointment of directors and disposal 
of profits. The act is not applicable to primary agricultural society, cooperative land mortgage 
bank and other cooperative society but few exceptions are given in Part V of the act. The 
banking company means a company doing the banking business. Commonly, the banking means 
accepting the deposits and giving the loans. In addition to this, there is a list of activities given in 
the act in which a banking company may get involved. But trading in goods or immovable 
 
 
property is prohibited for a banking company. No banking company is allowed to deal in goods 
or land and property business. 
 
 MINIMUM CAPITAL & RESERVE 
The section 11 of the act lays down the following minimum limit of paid capital and reserves: 
 
Minimum Paid-up Capital & Reserves for Banks 
                                                                                                                             ? 
  (I) Banks Incorporated in India Paid-up Capital 
& Total Reserves 
(A) 
 
 
 
 
 
 
 
(B) 
(i) 
 
 
(ii) 
 
 
 
 
(i) 
 
 
 
(ii) 
 
 
 
 
 
(i) 
 
(ii) 
A banking company incorporated in India having business 
offices in more than one states 
(Except Mumbai and Kolkata) 
A banking company incorporated in India having business 
offices in more than one states and having business offices 
in Mumbai or Kolkata or both 
If all business offices of a banking company are in the same 
states and among them : 
Any office is in Mumbai or Kolkata 
(for every business office situated at a place other than 
Mumbai or Kolkata, additional capital of 25,000 should be 
there limited to the maximum of 10 lakhs) 
If business office is in the state not in Mumbai or Kolkata  
(For every additional office in the same district, 10,000 and 
for every office situated in other districts, 25,000 but paid-
up capital and reserves of such bank need not be more than 
5 lakhs) 
(II) Bank Incorporated Outside India 
If they do not have any business office in Mumbai or 
Kolkata. 
If they have business office in Mumbai or Kolkata or in 
both. 
 
 
5 lakhs 
 
10 lakhs  
 
 
 
 
 
 
5 lakhs 
 
 
1 lakh 
 
 
 
15 lakhs  
 
20 lakhs 
 
Banking companies carrying on business in India must see to it that: 
 (a) the subscribed capital is not less than half of the authorized capitals 
 (b) the paid up capital is not less than half of the subscribed capital and 
 (c) the capital of the company consists of only or ordinary or equity shares 
Further, the underwriting commission, or brokerage or discount on shares issued by a banking 
company cannot exceed 2.5 per cent of the paid up value of the shares. A charge on unpaid 
 
 
capital cannot be created. No dividend can be declared unless expenses not represented by 
tangible assets have been completely written off. 
 
 BOOKS OF ACCOUNTS 
 
The banks maintain some books, ledgers and registers for accounting and record keeping of the 
business transactions. The precise description of them is given hereunder: 
Cash Book  
This book gives the summary of the receiving cashier’s counter cash book and paying cashier’s 
counter cash book. The receipt counter keeps the details of each transaction like – serial number, 
depositor’s name and amount received. Similarly, the payment counter keeps the details of each 
payment like- serial number, payee’s name, amount paid, number of token. The record of the 
cash book must tally with the sum total of the counters cash books.  
Cash Balance 
The cash balance at the close of the day is written in the book which is duly signed by the cashier 
and the manager. 
Day Book 
The day book is written by the cashier or accountant. It records day-to-day transactions relating 
to cash transfers and clearing etc. Its balancing is done on daily basis.  
Current Account Ledger 
It records the transactions of those customers who open current account. Generally, the bank 
does not pay interest on the balance of this account but a nominal charge is taken by the bank for 
rendering the services.  
Savings Bank Ledger  
It records the transactions of those customers who open savings account in the bank. The detailed 
description of the customer viz. name, address, occupation is recorded with an account number.  
If there are many savings account ledgers, they are to be serially numbered. 
Fixed Deposit Ledger 
It contains transactions of those customers who have deposited their money into the bank for a 
fixed period. Generally, at the top of the account, depositor’s name and address, rate of interest, 
period of deposit, the amount so deposited are to be recorded. 
 
 
 
General Ledger 
It is actually the key ledger of the accounting system of a bank. It contains the total amount in 
respect of all current accounts, total savings accounts, total loan accounts, total bills payable 
account, total expenses and total revenue accounts. Each ledger is kept under self balancing 
system. A trial balance can easily be prepared which helps to prepare the final account as well. 
Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, 
investment ledger may also be prepared. 
Registers 
In addition to the books and ledgers, few registers are maintained in a bank. The main registers 
are as under: 
a) Bills for collection Register 
b) Securities Register 
c) Document Register 
d) Standing Order Register 
e) Cheques Dishonour Register 
f) Draft Issue Register 
g) Draft Payable Register 
h) D.D. Register 
i) Foreign Letters of Credit Register 
 
 
 SOME IMPORTANT TERMS 
Some important terms particularly related to the accounting of a banking company are discussed 
hereunder: 
Statutory Reserve 
According to section 17 of the Banking Regulation Act, it is obligation for a banking company 
operating in India (including foreign banks) to create a reserve fund and transfer to it at least 25 
per cent of its profit as disclosed in profit & loss account before any dividend is declared. Such 
transfer of profits to reserve fund should be continued even after the aggregate amount of reserve 
fund exceeds its paid up capital. This reserve is called Statutory Reserve. It is to be written in 
liabilities side of the balance sheet under the head ‘Reserve & Surplus’. 
 
 
 
Unexpired Rebate on Bills Discounted 
The amount of discount on bills discounted is to be credited to ‘Discount Received a/c’. There 
may be some bills which have not been matured or due on the accounting date. Thus, if the 
maturity date of a bill falls after the end of the accounting year then the amount of discount 
related to the period falling after the end of the year will be called ‘unexpired Rebate or 
discount’. In other words, unexpired discount on bills discounted means the discount which has 
not been earned by the bank till the date of the accounting year or the discount which has been 
received but related to the coming year. If unexpired discount is given in the trial balance then it 
will be shown only in the liabilities side of the balance sheet.  
Customer’s Acceptance & Endorsement 
The credit of a bank is more acceptable than that of its customers. Hence, a bank is often 
requested by a customer to accept or endorse a bill of exchange on his behalf or give a guarantee 
of repayment of a loan raised by the customer. To safeguard its interests the bank may require 
the customer to deposit a security for an appropriate amount against a guarantee, or an 
acceptance or endorsement by the bank on behalf of the customer. A record of guarantee given 
or the particulars of the bill accepted or endorsed as well as the particulars of the security 
collected from the customer will have to be recorded in different registers. Outstanding amount 
of acceptances, endorsements and other obligations at the end of the year has to be shown as 
‘Contingent Liabilities’ in schedule 12 of the balance sheet of the bank. 
Bills for Collection 
A bank receives a large number of bills receivable from its customers for collection on the due 
date of the bills. The bank keeps these bills with itself till maturity and on realization credits the 
amounts to the clients concerned. The bank keeps a systematic record of all such bills in a 
separate register which is called Bills for Collection Register. The  total amount of all the bills 
lying with the bank for collection at the end of the year is shown separately at the foot of the 
balance sheet of the bank.  
Restrictions on Loan & Advances 
The RBI is authorized to determine the policy in relation to advances to be followed by banks. It 
may give direction to banks regarding the purposes for which advances may or may not be given. 
It may lay down the margins to be maintained in respect of secured loans. It may prescribe the 
amount of advances that may be made to any company, firm or individual. It may fix the rate of