A balance sheet of a bank shows all financial operations conducted by a bank for a certain period of time. It reveals the borrowed funds by them, their own funds, their sources, their placements in credit and other transactions.
It is recorded in the two ways. In the left part (asset) all assets are reflected and in the right (passive) – liabilities and capital of the bank are positioned. An asset is anything that can be old whereas a liability is an obligation of the financial institution that must be eventually paid back. The owner’s equity in a bank is often referred to as bank capital, which is the remaining amount when all assets have been sold and all liabilities have been paid. The relationship of all balance sheet components can be simply described by the following equation.
Bank Assets = Bank Liabilities + Bank Capital
Assets earn revenue and include:
-Cash in hand;
-Funds on correspondent accounts;
-Funds in reserve funds of the bank;
-Granted loans to legal entities and individuals; (client loan portfolio)
-Interbank loans granted;
Depending on the nature of the sources of funds, all liabilities differ in terms of their duration and cost. The main sources of funds as a rule, are deposits of individuals and legal entities, and in addition, funds of central (national) banks and loans obtained from other commercial banks.
-Funds of banks and other credit institutions;
-Clients accounts, including household deposits;
– The promissory notes issued by the bank;
By using liabilities the owners of banks can leverage their capital to earn much more value than would otherwise be possible using only the bank’s capital.
Also, Central banks regulate bank liabilities by setting mandatory reserve requirements from attracted deposits or by imposing administrative restrictions or incentives.
Assets and liabilities are further distinguished as being either current or long-term. Current assets are assets expected to be sold or otherwise converted to cash within 1 year; otherwise, the assets are long-term. Current liabilities are expected to be paid within 1 year; otherwise, the liabilities are long-term. Current assets and current liabilities are important in assessing liquidity of bank. The deduction of Current assets from Current liabilities gives us a working capital. It is a measure of liquidity. An excess in Working capital a bank is able to meet its short- term liabilities
Working Capital = Current Assets – Current Liabilities
Banks can also get more funds either from the bank’s owners, and these sources are referred as bank capital. Bank capital (= total assets – total liabilities) is the bank’s net worth. However, recent accounting changes have made it more difficult to determine a bank’s true net worth.