Accounts of Banking

Companies
DEFINITION
Section 5 of banking regulation act
defines banking as “the accepting, for
the purpose of lending or investment,
of deposit of money from the public
repayable on demand or otherwise
and withdrawable by cheque, draft,
order or otherwise.
Features Of Banking Company
The borrowing, raising, or taking up of money.
The lending or advancing of money either upon or without
security.
The granting and issuing of letters of credit, travellers
cheques and circular notes.
The buying and selling of bullion.
The buying and selling of foreign exchange including foreign
bank notes.
Contracting for public and private loans negotiating and
issuing the same.
Undertaking and executing trust.
Features Of Banking Company
The acquisition, constructing, maintenance and
alternation of any building or works necessary or
convenient for the purpose of the company.
Carrying on transacting of every kind of guarantee and
indemnity business.
The collecting and transmitting of money and securities.
 Undertaking the administration of estates as executor,
trustee or otherwise
General Information
No banking company can carry on business in India
unless its subscribed capital is not less than one- half of
the authorized capital and its paid up capital is not less
than one – half of subscribed capital.
A banking company cannot create any charge upon its
uncalled capital.
Every banking co.shall transfer a sum equal to 25% of
profits to statutory reserve.
A bank can open a branch only at the permission of RBI
Accounting System

The accounting system of a banking

company is different from that of a trading
or manufacturing company.
A bank has a large number of customers
whose accounts are to be maintained in
such a way so that these should be kept
upto date.
Features Of Banking Acc System
Entries in the personal ledgers are made directly from
vouchers.
From such entries in personal account each day
summary sheets in total are prepared.
 The general ledger’s trial balance is extracted and
agreed every day.
A trial balance of detailed personal ledger is prepared
periodically and get agreed with general ledger.
Two vouchers are prepared for every transaction not
involving cash- debit and credit voucher.
Accounts and Audit
Preparation of accounts:
On 31st March each and every banking company incorporated
in India or outside India ( through its branches) in respect of
all business transacted shall prepare a balance sheet and
profit and loss account as on the working day of the year.
Form A in third schedule is the balance sheet and Form B is
the profit and loss a/c ( revised) w.e.f to 1st April 1991 has to be
followed
The requirements of Companies Act, 2013 relating to balance
sheet and P&L a/c are not consistent with the Banking
Regulation – Not Applicable
Accounts and Audit
Audit of Accounts:
The Balance Sheet And Profit and Loss a/c of a
banking company is required to be audited by a
Chartered Accountant.
Appointment of auditor as per provisions of
Companies Act, 2013 .( powers , duties and liabilities
too)
Accounts and Audit
Filling of Accounts:
Three copies of the audited Balance Sheet And Profit and
Loss a/c together with auditors report shall be furnished as
returns to RBI within three months from the end of
accounting year to which they relate. (period can be
extended to another three months)
RBI has a right to ask for further information as it may
think proper (relating to business of banking co.)

Also should submit three copies of the audited Balance

Sheet And Profit and Loss a/c together with auditors
report to the Registrar of Companies.
Accounts and Audit
Publication of Accounts:
Balance Sheet And Profit and Loss a/c together with
auditors report shall be published in any newspaper
circulating at the place where it has principal office
within six months from the end of the accounting year
Accounting System
Accounting System of banking company is different from that of a trading firm or
manufacturing enterprise.

A bank has large number of customers whose accounts are to be maintained in

such a way so that these should be kept up to date and checked regularly.

Main features are as follows

i. Entries in personal ledgers are made directly from the vouchers
ii. From such entries in the personal ledgers each day summary sheets in total are
prepared which are posted to the control accounts in general ledger.
iii. The general ledger’s trial balance is extracted and agreed everyday
iv. All entries in the personal ledgers and summary sheets are checked by persons
other than those who made the entries with that most clerical mistakes are
detected before any other day begins.
v. A trial balance of detailed personal ledgers is prepared periodically (generally
two weeks) and get agreed with the general ledger control accounts
vi. Two vouchers are prepared for every transaction not involving cash – one debit
voucher and another credit voucher.
Books Required
a) Receiving Cashier’s Counter Cash Book
b) Paying Cashier’s Counter Cash Book
c) Current Accounts Ledger
d) Saving Bank Accounts Ledger
e) Fixed Deposit Accounts Ledger
f) Investment Ledger
g) Bills discounted and Purchase Ledger
h) Loan Ledger
i) Cash Credit Ledger
j) Customer’s Acceptances, Endorsements and Guarantee Ledger
k) Recurring Deposit Accounts Ledger
Books Required
The principal books of accounts are:
1) Cash book: consists the summary of the Receiving
Cashier’s Counter Cash Book and the Paying
Cashier’s Counter Cash Book

2) General Ledger: contains control accounts for the

subsidiary ledger listed above and account of
expenses and assets not covered by the subsidiary
ledger.
Books Required
In addition to the above books, the following are the chief
registers and memorandum books kept by a bank:
i. Demand draft Register
ii. Bills for collection Register
iii. Share security Register
iv. Safe Custody Register
v. Jewellery Register
vi. Letter of Credit Register
vii. Safe Deposit Vault Register
viii. Standing Order Register
Slip System of Posting
In this system, posting is made from slips filled in by the
customer and not from journals or cash books.

Slips are loose leaves of journals and these are supplied

either by the customers or by the bank staff.

In a banking company the main slips are pay in slips,

withdrawal slips and cheques ( filled in by the clients),
serves as a basis of entry in the General Ledger.
Slip System of Posting
Main reasons for the adoption of the slip system of
posting by banks is as follows:
a) The bank must have customer’s account up-to-date. It
becomes necessary for a bank to know the position of its
individual customer’s account at any time and to see that
the transactions are recorded as soon as they take place.
b) Number of transactions in a bank is very huge, slip
system can suitable distribute the work of posting
among many persons
c) Ensures smooth flow of work
Advantages of Slip System of Posting
a) Saving of time and labour: as most of the slips are filled in by its
customers
b) No need of subsidiary books
c) Minimum delay: in recording entries as slips can easily pass to clerks
concerned
d) Division of Labour: due to large number of transactions in the bank
e) Smooth Accounting: The writing of day book and posting of the ledger
can be done simultaneously without lost of time
f) Reliable Accounting System: as most of the slips are prepared by
customers themselves and each transaction is recorded in different
books which are maintained on self .
g) Perfect Basis Of Auditing: as individual slips are filled by the
customers
h) Proper Evidence: can be shown to the satisfaction of the customers if
needed since they are filled by customers
Disadvantages Slip System of Posting
Risk of loss or destruction of slip: as there are loose
Difficulty in verification: as subsidiary books are not
kept.
Inconvenience to customers: (illiterate and semi literate
– especially for amount in words in figures)
Risk of manipulation and misappropriation: dishonest
employees cam embazzle the money by destroying the loose
and large number of slips and manipulating accounts.
Expensive system: Slip system becomes difficult due to
large number of daily transactions and is expensive to keep
a date wise record of such slips
Provision for Taxation
Is charged to P&L a/c under the heading “Provisions &
Contingencies” and in the Balance Sheet under the
heading “ Other Liabilities & Provisions”
Is to be made after making provisions for doubtful
debts.
Provisions
Classification of advances into following four groups
i. Standard assets
ii. Sub standard assets
iii. Doubtful assets
iv. Loss assets
Provisions
Standard assets
Standard assets are those loans which have not defaulted on
repayment of principal or payment of interest.
These assets do not show signs of any problem and carry no more that
normal risk attached to the business. However, banks are supposed to
make provision for these too but the rates vary from sector to sector.

Substandard assets
When an asset or loan remains non-performing for 12 months or less
and the underlying guarantee is not enough to pay back the loan, it is
classified as a substandard asset. In other words, it is certain that the
bank is set to take a hit, even if partial, due to non-repayment
Provisions
Doubtful assets
An asset is classified as doubtful if it has remained substandard for
a period of more than 12 months. For these assets it is assumed that
even if the underlying security is liquidated, probability of
recovering the loan extended is doubtful.

Loss assets
These are assets which have been identified by either the bank or
external auditors to be permanent non-performer and there are
negligible chances of recovering the advance.
However, these assets may still not be written off from the books of
the banks as banks may hope to salvage some portion of the loan.
PROVISIONS
Assets % of Provision
Standard assets 40%
Substandard assets 15%
Doubtful assets
For one year 25%
For two years 40%
For three years 40%
For more than 3 years 100%

Loss assets 100%