The two main components of a bank’s balance sheet are its assets and liabilities.
Bank’s assets and liabilities definition is same as we talk about their simple definitions. But the examples that come under the category vary. These are explained below:
ASSETS are the ones which are useful or valuable things a person/organization has like goods, property, vehicles, equipment, machinery, etc.
If we talk about bank’s assets: They are those which the bank has and can be readily converted to cash whenever bank requires money.
The bank’s assets are
- physical assets – this includes land, furniture, building, etc owned by bank. They are the minor assets.
- cash present with bank – cash which is used for day to day transactions such as for cash withdrawals and cheque processing.
- the interest amount on loans – it is a major asset of a bank because they earn more money by interest amounts of loans than they have to give on saving accounts.
- investments – this include investments in government securities and other securities, treasury bills, etc.
LIABILITIES are the ones for which an amount of money is owed like in a company the salaries of employees are to be given, etc.
If we talk about bank’s liabilities: They are those which the bank has from the customer deposits and borrowed money for bank’s purpose.
The bank’s liabilities are
- deposits – customers deposits in the savings account and current account. They can withdraw this amount whenever they want, so bank have to keep this money aside and cant use it because a customer can come any time to bank to withdraw his money. Other type of deposits such of certificates of deposits.
- borrowings – they include borrowings from other banks including RBI.
Assets and liabilities of bank can be calculated to find the bank’s capital.
Bank Capital = Total Assets – Total Liabilities; as the total amount of money the bank has and the money which is to be kept aside to be given to customers and lenders.
what is a Bank Capital:
Bank capital is the difference between a bank’s assets and its liabilities, and it represents the net worth of the bank or its equity value to investors. A bank’s capital can be thought of as the margin to which creditors are covered if the bank would liquidate its assets.