UNIT 17 ACCOUNTS OF BANKING COMPANIES – ACCOUNTING TREATMENT

Structure

17.0 Objectives
17.1 Introduction
17.2 Minimum Capital & Reserve
17.3 Books of Accounts
17.4 Some Important Terms
17.5 P& L Account and Balance Sheet of Banking Companies
17.6 Let Us Sum Up
17.7 Key Words
17.8 Some Useful Books
17.9 Answer to Check Your Progress
17.10 Terminal Questions

17.0 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

17.1 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

34
property is prohibited for a banking company. No banking company is allowed to deal in goods
or land and property business.

17.2 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) (i) A banking company incorporated in India having business
offices in more than one states
(Except Mumbai and Kolkata) 5 lakhs
(ii) A banking company incorporated in India having business
offices in more than one states and having business offices 10 lakhs
in Mumbai or Kolkata or both
If all business offices of a banking company are in the same
states and among them :
(B) (i) 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) 5 lakhs
(ii) 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- 1 lakh
up capital and reserves of such bank need not be more than
5 lakhs)
(II) Bank Incorporated Outside India
(i) If they do not have any business office in Mumbai or 15 lakhs
Kolkata.
(ii) If they have business office in Mumbai or Kolkata or in 20 lakhs
both.

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

35
capital cannot be created. No dividend can be declared unless expenses not represented by
tangible assets have been completely written off.

17.3 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.

36
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

17.4 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’.

37
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

38
interest and other conditions on which advances or other financial accommodation may be made
or guarantees may be given.
As per provisions of the law, a bank cannot grant loans or advances:
(a) on the security of its own shares
(b) to any of its directors
(c) to any firm in which any of its directors is interested as partner, manager or guarantor
(d) to any company of which any of its director is director, manager, employee, guarantor or in
which he holds substantial interest
(e) to any individual in respect of whom any of its director is a partner or guarantor

CRR, SLR, Repo Rate & Reverse Repo Rate

The CRR is cash reserve ratio under which a certain percentage of the total bank deposits has to
be kept in the current account with the RBI. Thus, the bank cannot lend the money to corporate
or individual borrowers and bank cannot use the money for investment purposes. The bank does
not earn anything on it.
The SLR is statutory reserve ratio under which a certain percentage of total bank deposits has to
be invested in specified securities predominantly Central Govt. or State Govt. securities. As the
money goes into investment as Govt. securities, it earns some amount of interest on the
investment.
The repo rate is a rate at which banks borrow from RBI for short period up to 7 or 14 days but
predominantly overnight. The RBI manages this repo rate which is the cost of credit for a bank.
This becomes a floor below which the short term interest rates do not go. The higher the repo
rate means the cost of short term money is high. The lower the repo rate means the cost of short
term money is low. The higher repo rate may slow down the economy growth and lower the repo
rate may enhance economy growth.
The reverse repo rate is a rate which the RBI offers to banks when they deposit their surplus cash
with the RBI for shorter periods. In other words, it is the rate at which the RBI borrows from the
commercial banks. When bank have excess funds but do not have any other lending or
investment options, they deposit the surplus funds with the RBI and earn interest on the
deposited funds.

39
The reverse repo rate has an inverse relationship with the money supply in the economy. During
high levels of inflation in the economy, the RBI increase the reverse repo rate which encourages
the banks to park more funds with the RBI to earn higher returns on idle cash.

17.5 P & L ACCOUNT AND BALANCE SHEET OF BANKING COMPANIES

Every banking company is required to prepare its annual accounts in accordance with section 29
of the BR Act.
(a) The final accounts must be prepared in the forms set out in the third schedule to the
act or as near there to circumstances admit.
(b) The final accounts must be signed by the manager or principal officer of the company
and at least three directors of the company.
(c) The accounts and balance sheet together with the auditor’s report should be published
in the prescribed manner. Three copies of the same must be furnished as returns to the RBI
within three months from the end of the accounting period.
(d) The banking company shall send to the Registrar of Joint Stock Companies three
copies of profit and loss account and balance sheet and of the auditor’s report.
The prescribed format of P&L, Balance Sheet and sixteen schedules are given in the Unit
16 under the heading 16.2.7. In addition to these schedules, banks may prepare schedule 17 for
notes on accounts and schedule 18 for disclosure of accounting policies.

Illustration 17.1
For the year ending on March 31, 2021, the balances of The Narmada Bank Ltd. are given
hereunder:
₹
Interest on loan 2,50,000
Interest on fixed deposit 36,000
Salaries 30,000
Postage 5,000
Printing & stationery 6,000

40
Telephone & internet 4,000
Rent 7,000
Interest on saving bank deposit 20,000
Commission received 1,40,000
Legal charges 15,000
Insurance 9,000
Interest on cash credit account 3,40,000
Interest on overdraft 1,20,000

Prepare P&L Account for the year ended on March 31, 2021.

Solution
Narmada Bank Ltd.
P&L A/c for the year ending on March 31, 2021
Schedule Year ended
31-03-2021
[₹ in ’000]
I Income
Interest earned 13 710.00
Other income 14 140.00
Total 850.00
II Expenditure
Interest Expenses 15 56.00
Operating Expenses 16 76.00
Provisions & Contingencies - ---
132.00
III Profits/Losses
Net Profit for the year 718.001

IV Appropriations:

41
 Transfer to Statutory Reserve 179.502
Transfer to other Reserve ---
Proposed Dividend ---
Balance c/f to Balance Sheet 538.503
Total 718.00

1
850 – 132 = 718
2 718𝑋25
= 179.50
100
3
718 – 179.5 = 538.50
Schedule 13: Interest Earned
Year ended
31-03-2021
[₹ in ’000]
Interest on loan 250
Interest on cash credit 340
Interest on overdraft 120

710

Schedule 14: Other Incomes

Year ended
31-03-2021
[₹ in ’000]
Commission Received 140

Schedule 15: Interest Expenses

Year ended
31-03-2021
[₹ in ’000]
(i) Interest on fixed deposit 36

42
 (ii) Interest on saving bank deposit 20

56

Schedule 16: Operating Expenses

Year ended
31-03-2021
[₹ in ’000]
i. Salaries 30
ii. Telephone & Internet 4
iii. Postage 5
iv. Printing & Stationery 6
v. Rent 7
vi. Insurance 9
vii. Legal charges 15

76

Illustration 17.2
The following are the figures extracted from the books of The Mahananda Bank Ltd. as on
March 31, 2021
₹
Interest on advances 3,40,000
Interest on overdraft 4,20,000
Interest on cash credit 3,10,500
Commission 40,000
Profit on sale of investment 5,000
Interest on savings deposit 3,40,500
Interest on fixed deposit 4,30,500
Printing & stationery 7,200

43
Postage & telephone 6,400
Audit fee 3,600
Rent & taxes 7,800
Sundry expenses 5,200
Insurance 2,800

Prepare P&L Account for the year ended on March 31, 2021.
Solution
Mahananda Bank Ltd.
P&L A/c for the year ending on March 31, 2021
Schedule Year ended
31-03-2021
[₹ in ’000]
I Income
Interest earned 13 1070.50
Other income 14 45.00
Total 1115.50
II Expenditure
Interest Expenses 15 771.00
Operating Expenses 16 33.00
Provisions & Contingencies - ---
804.00
III Profits/Losses
Net Profit for the year 311.501

IV Appropriations:
Transfer to Statutory Reserve 77.882
Transfer to other Reserve ---
Proposed Dividend ---
Balance c/f to Balance sheet 233.62

44
 Total 311.50

1
1115.50 – 804 =
2 311.5𝑋25
= 77.88
100

Schedule 13: Interest Earned

Year ended
31-03-2021
[₹ in ’000]
i. Interest on loan 340.0
ii. Interest on cash credit 310.5
iii. Interest on overdraft 420.0

1070.50

Schedule 14: Other Income

Year ended
31-03-2021
[₹ in ’000]
I Commission Received 40.0
II Profit on Sale of Investment 5.0

45.0

Schedule 15: Interest Expenses

Year ended
31-03-2021
[₹ in ’000]
(i) Interest on fixed deposit 430.5
(ii) Interest on saving bank deposit 340.5

45
 771.0

Schedule 16: Operating Expenses

Year ended
31-03-2021
[₹ in ’000]
i. Printing & stationery 7.2
ii. Postage & telephone 6.4
iii. Audit fee 3.6
iv. Rent & taxes 7.8
v. Sundry expenses 5.2
vi. Insurance 2.8

33.0

Illustration 17.3
The following are the figures extracted from the books of The Bhagirath Bank Ltd. as on March
31, 2021
₹
Interest on balance with RBI 5,30,500
Commission received 2,20,500
Interest on loan 3,10,000
Interest on overdraft 4,20,000
Interest on savings bank deposit 1,10,500
Interest on fixed deposit 20,500
Rent 30,500
Directors’ fee 20,000
Auditors’ fee 30,000
Profit on sale of investment 20,000
Loss on sale of land 10,000

46
Legal charges 4,000
Repair & maintenance 3,000
Postage & internet 7,000
Advertisement 6,000
Insurance 5,000
Provision for bad debts 30,000
Provision for tax 20,000
Transfer to General Reserve 20% of Profit

Prepare P&L Account for the year ended on March 31, 2021.

Solution
Bhagirath Bank Ltd.
P&L A/c for the year ending on March 31, 2021
Schedule Year ended
31-03-2021
[₹ in ’000]
I Income
Interest earned 13 1260.50
Other income 14 230.50
Total 1491.00
II Expenditure
Interest Expenses 15 131.00
Operating Expenses 16 105.50
Provisions & Contingencies - 50.001
286.50
III Profits/Losses
Net Profit for the year 1204.50

IV Appropriations:

47
 Transfer to Statutory Reserve 301.122
Transfer to other Reserve 240.903
Proposed Dividend ---
Balance c/f to Balance Sheet 662.48
Total 1204.50

1
Provision for Bad debts 30,000+20,000 Provision for Tax=50,000
21204.50𝑋25
= 301.12
100

31204.5𝑋20
= 240.90
100

Schedule 13: Interest Earned

Year ended
31-03-2021
[₹ in ’000]
i. Interest on loan 310.00
ii. Interest on balance with RBI 530.50
iii. Interest on overdraft 420.00

1260.50

Schedule 14: Other Income

Year ended
31-03-2021
[₹ in ’000]
i. Commission Received 220.50
ii. Profit on Sale of Investment 20.00
iii. Loss on Sale of Land -10.00
230.50

Schedule 15: Interest Expenses

48
 Year ended
31-03-2021
[₹ in ’000]
(i) Interest on fixed deposit 110.50
(ii) Interest on saving bank deposit 20.50

131.00

Schedule 16: Operating Expenses

Year ended
31-03-2021
[₹ in ’000]
i. Rent 30.50
ii. Directors’ fee 20.00
iii. Auditors’ fee 30.00
iv. Legal charges 4.00
v. Repairs & Maintenance 3.00
vi. Postage & internet 7.00
Vii. Advertisement 6.00
Viii. Insurance 5.00

105.50

Illustration 17.4
Prepare P&L A/c with the following figures extracted from the books of Kuber Bank Ltd. as on
31-03-2021. ₹
Interest on Loan 2,60,000
Interest on fixed deposit 3,20,000
Commission 8,800

49
Establishment expenses 25,000
Discount on bills discounted 1,30,000
Interest on cash credit 2.40,000
Rent & Taxes 30,000
Interest on overdraft 1,40,000
Interest on savings account 50,000
Postage & telephone 35,000
Printing & stationery 40,000
Sundry expenses 30,000
Income on investment 70,000
Profit on sale of investment 80,000

Bad debts to be written off ₹ 60,000 and Provision for Taxation to be made @ 50%.
Solution
Kuber Bank Ltd.
P&L A/c for the year ending on 31-03-2021
Schedule Year ended
31-03-2021
[₹ in ’000]
I Income
Interest earned 13 840.00
Other income 14 88.80
Total 928.80
II Expenditure
Interest Expenses 15 370.00
Operating Expenses 16 135.00
Provisions & Contingencies 181.901
686.90
III Profits/Losses
Net Profit for the year 241.90

50
 IV Appropriations:
241.90𝑋25 60.48
Transfer to Statutory Reserve 100
-----
Transfer to other Reserve
Proposed Dividend ---
Balance c/f to Balance Sheet 181.42
Total 241.90

1
Provision for Taxation @ 50% of Profit:
Total Income 928.80
Less: Int. Expenses +Operating Exp. 505.00
423.80
Less: Bad debts 60.00
Taxable Profit 363.80
Provision for Tax @50% 181.90
181.90

Schedule 13: Interest Earned

Year ended
31-03-2021
[₹ in ’000]
i. Interest on loan 260
ii. Interest on cash credit 240
iii. Interest on overdraft 140
iv. Discount on bills discounted 130
v. Income on investment 70
840

51
 Schedule 14: Other Income
Year ended
31-03-2021
[₹ in ’000]
i. Commission Received 8.80
ii. Profit on Sale of Investment 80.00

88.80

Schedule 15: Interest Expenses

Year ended
31-03-2021
[₹ in ’000]
(i) Interest on fixed deposit 320.00
(ii) Interest on saving bank deposit 50.00

370.00

Schedule 16: Operating Expenses

Year ended
31-03-2021
[₹ in ’000]
i. Rent & Taxes 30.00
ii. Postage & Telephone 35.00
iii. Printing & Stationery 40.00
iv. Sundry Expenses 30.00

135.00

52
Illustration 17.5
The following are the figures of advances of a Commercial Bank:
₹
Advances to priority sector 62, 00,000
Advances to public sector 28, 00,000
Advances to other banks in India 25, 00,000
Other advances 15, 00,000
Further details of the above advances were as under:
Bills purchased & discounted 35, 00,000
(Including 10, 00,000 outside India)
Cash credit, overdraft and loan payable on demand 82, 00,000
Term loan 23, 00,000
Out of the above advances ₹ 1, 10 lakh were secured by tangible assets while those ₹ 20 lakh
were secured by bank or Govt. guarantee. ₹ 10 lakh were unsecured.
Prepare the schedule of advances as per Banking Regulation Act.

Solution
Schedule 9: Advances ₹
A (i) Bills purchased & discounted 35,00,000
(ii) Cash credit, overdraft & loans payable on demand 82,00,000
(iii) Term loan 23,00,000

Total 1,40,00,000
B (i) Secured by tangible assets 1,10,00,000
(ii) Covered by bank/Govt. guarantee 20,00,000
(iii) Unsecured 10,00,000

Total 1,40,00,000
C (i) Advances in India
(a) Priority sector advances 62,00,000

53
 (b) Public sector advances 28,00,000
(c) Banks 25,00,000
(d) Others 15,00,000

Total 1,30,00,000
(ii) Advances outside India:
(i) Due from banks
(ii) Due from others
(a) Bills purchased & discounted 10,00,000
(b) Syndicated loans
(c) Others
Total 10,00,000
Grand Total [C(i) and C(ii)] 1,40,00,000

Check Your Progress A

State whether the following statements are True or False:
1. A banking company is now allowed to deal in goods and immovable property.
2. Non-banking assets should be disposed off within 5years by a banking company.
3. The item, bills for collection is written as an income in the balance sheet of a bank.
4. The reverse repo rate is always higher than repo rate.
5. Repo rate is used to control inflation.
6. The capital of a banking company consists of equity and preference both the shares.
7. The contingent liabilities are to be added to other liabilities in schedule 12.
8. A charge on uncalled capital is invalid.
9. A floating charge created without the certificate from the RBI is invalid.
10. The rebate on bills discounted is an income received in advance

Illustration 17.6
From the books of account of the Maniratnam Bank Ltd. as on March 31, 2021 the following
details regarding loan and advances are given:
₹

54
Cash credit, overdraft and Loan (secured by tangible assets) 60,00,000
Bill purchased & discounted [outside India 4,00,000] 20,00,000
Term loan (guaranteed by Central Govt.) 30,00,000
Advances to priority sector 40,00,000
Advances to public sector 30,00,000
Advances to other banks in India 25,00,000
Other advances 11,00,000

Prepare the schedule of advances as per Banking Regulation Act.

Schedule 9: Advances
₹
A (i) Bills purchased & discounted 20,00,000
(ii) Cash credit, overdraft & loans payable on demand 60,00,000
(iii) Term loan 30,00,000

Total 1,10,00,000
B (i) Secured by tangible assets 60,00,000
(ii) Covered by bank/Govt. guarantee 30,00,000
(iii) Unsecured 20,00,000

Total 1,10,00,000
C (i) Advances in India
(a) Priority sector advances 40,00,000
(b) Public sector advances 30,00,000
(c) Banks 25,00,000
(d) Others 11,00,000

Total 1,06,00,000
(ii) Advances outside India:
(iii) Due from banks ---

55
 (iv) Due from others
(d) Bills purchased & discounted 4,00,000
(e) Syndicated loans ----
(f) Others ----
Total 4,00,000
Grand Total [C(i) andC(ii)] 1,10,00,000

Illustration: 17.7
The following balances appeared in the books of Kaveri Bank Ltd. as on March 31, 2021
₹
Share capital 20,000 share ₹ 100each) 20,00,000
Reserve fund 5,00,000
Local bills discounted 6,00,000
Overdraft 10,00,000
Cash credit 5,00,000
Term loan 4,00,000
Investment in shares 5,60,000
Demand deposit:
From banks 10,00,000
From others 5,00,000
Term Deposit:
Banks 3,20,000
Others 2,80,000
Borrowing in India: other banks 8,00,000
Bills payable 1,00,000
Unclaimed dividend 2,50,000
Cash in hand 3,60,000
Cash with bank in India 7,40,000
Stationery & stamps 1,40,000
Building 15,00,000

56
Furniture & fixture 2,00,000
P&L A/c credit balance (Current year Profit 2,00,000) 2,50,000

Make Statutory Reserve @25%. Prepare Balance Sheet as per banking law.

Solution
Balance sheet of Kaveri Bank Ltd. as on March 31, 2021

Capital & Liabilities Schedule ₹

Capital 1 20,00,000
Reserve & Surplus 2 7,50,000
Deposits 3 21,00,000
Borrowings 4 8,00,000
Other Liabilities & Provisions 5 3,50,000

Total 60,00,000

Assets
Cash & balances with RBI 6 3,60,000
Balances with banks, money at call & short notice 7 7,40,000
Investment 8 5,60,000
Advances 9 25,00,000
Fixed assets 10 17,00,000
Other assets 11 1,40,000

Total 60,00,000
Contingent Liabilities 12 Nil
Bills for collection Nil

57
 Schedule 1: Capital
Authorized capital [20,000 shares of ₹ 100 each] 20,00,000

Total 20,00,000

Schedule 2: Reserve & Surplus

(i) Statutory Reserve 25,000

(ii) Revenue & other Reserve 5,00,000
(iii) P&L Account 2,25,000

Total 7,50,000

Schedule 3: Deposits
I. Demand deposit
(i) From banks 10,00,000
(ii) From others 5,00,000
II. Savings Bank deposit Nil
III. Term Deposit
(i) From banks 3,20,000
(ii) From others 2,80,000

Total 21,00,000

Schedule 4: Borrowings
I. Borrowing in India 8,00,000
II. Borrowings outside India Nil
Total 8,00,000

58
 Schedule 5: Other Liabilities & Provisions
I. Bills payable 1,00,000
II. Inter office adjustments (net) ---
III. Interest accrued ---
IV. Unclaimed dividend 2,50,000

Total 3,50,000

Schedule 6: Cash & Balances with RBI

Cash in hand (including foreign currency notes) 3,60,000

Total 3,60,000

Schedule 7: Balances with Banks & Money at call & short notice
I In India
(i) Balance with banks 7,40,000
(ii) Money at call and short notice Nil
Total 7,40,000
II Outside India
(i) Balance with banks Nil
(ii) Money at call and short notice Nil
Total Nil
Grand Total (I+II) 7,40,000

Schedule 8: Investments
I Investment in India
Shares 5,60,000
Total 5,60,000
II Investment outside India Nil

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 Total Nil
Grand Total (I+II) 5,60,000

Schedule 9: Advances
I. Bills purchased & discounted 6,00,000
II. Cash credit and overdraft 15,00,000
III. Term loan 4,00,000

Total 25,00,000

Schedule 10: Fixed Assets

I Premises 15,00,000
II Furniture & Fixtures 2,00,000

Total 17,00,000

Schedule 11: Other Assets

Stationery & Stamps 1,40,000

Total 1,40,000

17.6 LET US SUM UP

The primary function of a banking company is accepting deposits and giving loans. They are also
allowed certain business in money market and capital market. But they are not allowed to deal in
goods and immovable property.
The main accounting books kept in banking business are cash book, day book, cash balance,
ledgers and registers.
The important provisions regarding dividend: (1) No dividend can be declared unless expenses
not represented by tangible assets have been completely written off, (2) At least 25 per cent of its
profit is required to be transferred to statutory reserve before any dividend is declared.
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There is a restriction on loan and advances that a banking company cannot grant loan on the
security of its own shares. It cannot give loan to any of its directors or to any firm in which its
director is interested in any way or holds substantial interest.
The prominent tools applied for credit control by the RBI are SLR, CRR, Repo rate, Reverse
Repo Rate. They are used by the RBI for either to reduce or enhance the credit expansion in the
market.
A banking company is required to prepare its final accounts in accordance with the section 29 of
the BR Act. The format for P&L account and Balance sheet are given in the schedule III as
annexure A and annexure B. There are sixteen schedules in the format which are part and parcel
of the final accounts of a banking company. The copy of the final accounts is to be submitted to
RBI and the Registrar of Companies as well.
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 as information only.
The outstanding amount of acceptances and endorsement and other liabilities at the end of the
year is shown as contingent liabilities in schedule 2 of the balance sheet of the bank.

Check Your Progress- B (Multiple Choice Questions)

1. The financial statement of banks are prepared in:
(a) Horizontal form
(b) Vertical form
(c) ‘T’ form
(d) None of the above
2. The subscribed capital of a bank should not be less than of:
(a) 25% of authorized capital
(b) 50 % of authorized capital
(c) 75% of authorized capital
(d) None of the above
3. Paid up capital of a bank should not be less than of :
(a) 25% of subscribed capital
(b) 50% of subscribed capital
(c) 75% of subscribed capital
(d) None of the above

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4. Banks show the provision for income tax under the heading:
(a) Contingent liabilities
(b) Anticipated liabilities
(c) Other liabilities and Provisions
(d) None of the above
5. The rebate on bills discounted is an:
(a) Expenditure
(b) Expenditure incurred in advance
(c) Income received in advance
(d) None of the above
6. Bills for collection is written in balance sheet as :
(a) An income
(b) An expenditure
(c) An information
(d) None of the above
7. As per prudential norms, banks make provision on standard assets also @:
(a) 1%
(b) .50%
(c) .40%
(d) None of the above
8. The non-banking assets must be disposed off by a banking company within:
(a) One year
(b) Three years
(c) Five years
(d) Seven years
9. The item, non-banking assets is related to:
(a) Non –Banking Finance Companies
(b) Residuary Non-Banking Companies
(c) Non Performing Assets
(d) None of the above

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 10. A banking company is not allowed to deal in:
(a) Goods
(b) Immovable property
(c) Bartering
(d) All of the above
11. A banking company cannot pay dividend unless it has completely written off:
(a) Preliminary expenses
(b) Share selling commission
(c) Brokerage
(d) all of the above
12. The outstanding amount of acceptances & endorsements is shown as contingent
Liabilities in:
(a) schedule 12 of balance sheet
(b) schedule 13 of balance sheet
(c) schedule 14 of balance sheet
(d) none of the above
13. The discount of shares issued by a banking company cannot exceed:
(a) 2.5 per cent of the paid up value of shares
(b) 5 per cent of the paid up value of shares
(c) 7.5 per cent of the paid up value of shares
(d) none of the above

17.7 KEY WORDS

Bank Overdraft: A facility offered to current account holders, they are allowed to withdraw
more than their balance. It is a short term loan or advance.
Cash Reserve Ratio: The certain percentage of the total bank deposits has to be kept in current
account with RBI, the bank does not earn anything on it.
Non-banking Asset: An asset charged in favour of the bank and taken in its possession in case
of failure the debtor to repay the loan in time.
Repo Rate: The rate at which RBI lends money to commercial banks. Repo rate is used to
control inflation.

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Statutory Liquidity Ratio: Besides CRR, banks have to invest certain percentage of their
deposit in Govt. securities. This percentage is called SLR.
Statutory Reserve: A reserve to be created by the banking company as per section 17 of
Banking Regulation Act 1949.

17.8 SOME USEFUL BOOKS

 Arulanandam MA & Raman KS 2012, Advanced Accountancy, Himalaya Publishing

House: Mumbai (Chapter 10)
 Maheshwari SN & Maheshwari SK 2015 Advanced Accountancy Vol. II X Ed., Vikas
Publishing House (P) Ltd. New Delhi (Sec. II Chapter 2)
 Shukla MC et. al. 2016 Advanced Accounts Vol. II, S. Chand & Co. New Delhi (Chapter
26)
 Singh SK 2016, Corporate Accounting, SBPD Publishers: Agra (Chapter 14- Accounts of
Banking Companies)

17.9 ANSWERS TO CHECK YOUR PROGRESS

A (1) True (2) False (3) False (4) False (5) True (6) False (7) False (8) True (9) True
(10) true
B (1) b (2) b (3) b (4) c (5) c (6) c (7) c (8) d (9) d (10) d (11) d (12) a (13) a

17.10 TERMINAL QUESTIONS

1. Explain the books of account generally kept by the Bank.

2. Prepare a Balance Sheet of a bank with imaginary figures along with the prescribed
schedules as per the banking law.
3. Give a precise description of the schedules to be prepared for a P&L account of Banking
Company.
4. Discuss the Minimum Paid up capital and Reserve to be maintained by the Banks.
5. Write short notes on the following:
a) Statutory Reserve

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 b) Restriction on loan and advance
c) Statutory Liquidity Ratio
d) Customers’ Acceptances & Endorsements
e) Unexpired rebate on bills discounted

Exercises:
Q. 1. On March 31, 2021 the position of total advances of the Maniratnam Bank Ltd. was as
under:
₹
Advances to priority sector 30,00,000
Advances to public sector 10,00,000
Advances to other banks in India 15,00,000
Other advances 10,00,000
The details of the above advances were as under:
Bills purchased and discounted 10,00,000
(including 3,00,000 outside India)
Cash credit, overdraft and loan payable on 30,00,000
demand
Term loan 18,00,000

Out of the above advances 50 lakh were secured by tangible assets with those of 6 lakh were
secured by bank and government guarantee. The rest were unsecured. Prepare the schedule of
advances as per Banking Regulation Act.
Answer: Total advances ₹ 58, 00,000

Q. 2. From the following particulars, prepare P&L Account of the Maha Laxmi Bank Ltd. for
the year ending March 31, 2021
₹
Interest on loans 2,60,000
Interest on fixed deposit 3,20,000
Commission 8,800
Establishment expenses 25,000

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Discount on bills discounted 1,30,000
Interest on cash credit 2,40,000
Rent & Tax 30,000
Interest on overdrafts 1,40,000
Interest on saving account 50,000
Postage & telephone 35,000
Printing & stationery 40,000
Sundry expenses 30,000
Income from investment 70,000
Profit on sale of investment 80,000

Bad debts to be written of amounted to ₹ 60,000 and Provision for Taxation may be made @ 50
per cent.
Answer: Profit 2, 41,900, Statutory Reserve 1, 81,900, Balance transferred to Balance Sheet 1,
81,420

Q. 3 From the following particulars prepare P&L Account of the Yamuna Bank Ltd. for the year
ending March 31, 2021
₹
Interest on deposits 30,00,000
Commission (cr.) 4,00,000
Interest on Loan 26,00,000
Rent & Tax 5,00,000
Establishment 8,00,000
Discount on bills discounted 16,00,000
Interest on overdrafts 15,00,000
Sundry charges 4,00,000
Interest on cash credit 25,00,000
Auditor’s fee 40,000
Director’s fee 20,000

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Bad debts to be written off 5,00,000

Answer: Net Profit 38, 40,000 Reserve 9, 60,000 Profit transferred to Balance Sheet 28, 80,000

Q.4 The following are the balances from the accounts of The Konark Bank Ltd. You are required
to prepare P&L Account for the year ending March 31, 2021 on the prescribed format along with
its enclosures.
₹
Interest on loan 6,00,000
Interest on fixed deposits 4,00,000
Commission received 1,20,000
Salaries & allowances 1,10,000
Discount on bills discounted 4,20,000
Interest on cash credit 6,40,000
Interest on current accounts 50,000
Rent & Taxes 40,000
Interest on overdrafts 3,20,000
Director’s fee 6,000
Auditor’s fee 8,000
Interest on savings bank accounts 1,20,000
Postage & telephone 4,000
Printing & stationery 6,000
Locker rent 3,000
Transfer fee 2,000
Depreciation on bank’s properties 6,000
Sundry income and charges 7,000
Other information is as follows:
a. Rebate on bills discounted 1,20,000
b. Bad debts 80,000
c. Provision for income tax 2,00,000

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Ans. Profit 10, 62,000, Statutory Reserve 2, 65,500, Profit transferred to Balance Sheet 7, 96,500

Q.5 The Trial Balance of The Padamnabham Bank Ltd. as on March 31, 2021 showed the
following balances:
₹
Authorized capital 10,000 share ₹ 200 each 20,00,000
Issued and subscribed capital 10,00,000
Money at call & short notice 3,00,000
Investment 15,00,000
Acceptance & endorsement 3,00,000
Bills for collection 1,50,000
Bills payable 2,00,000
Furniture & fixtures 1,50,000
Land & building 5,00,000
Bills discounted 3,00,000
Loans 3,50,000
Cash credits 6,00,000
Current accounts 8,00,000
Fixed deposit 13,00,000
Cash certificate issued 2,00,000
Profit for the year 1,00,000
Cash in hand 1,00,000
Cash with RBI 3,00,000
Savings bank account 4,00,000
Reserve fund 1,00,000

Prepare Balance Sheet of the bank as per banking regulations.

Ans. Balance Sheet total 41, 00,000

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