The balance sheet of a bank – An Analysis

The balance sheet of a commercial bank is a statement of its assets and liabilities. Assets are what others owe the bank, and what the bank owes others constitutes its liabilities. The business of a bank is reflected in its balance sheet and hence its financial position as well.

The balance sheet is issued usually at the end of every financial year of the bank. The balance sheet of the bank comprises of two sides; the assets side and the liabilities side. It is customary to record liabilities on the left side and assets on the right side. The following is the proforma of a balance sheet of the bank.

Balance Sheet of the Bank

Liabilities Assets
1. Capital 1. Cash
a. Authorised capital a. Cash on hand
b. Issued capital b. Cash with central bank and other banks
c. Subscribed capital  
d. Paid-up-capital  
2. Reserve fund 2. Money at call and short notice
3. Deposits 3. Bills discounted
4. Borrowings from other banks 4. Bills for collection
5. Bills payable 5. Investments
6. Acceptances and endorsements 6. Loans and advances
7. Contingent liabilities 7. Acceptances and endorsement
8. Profit and loss account 8. Fixed assets
9. Bills for collection  


Liabilities are those items on account of which the bank is liable to pay others. They denote other’s claims on the bank. Now we have to analyse the various items on the liabilities side.


The bank has to raise capital before commencing its business. Authorised capital is the maximum capital upto which the bank is empowered to raise capital by the Memorandum of Association. Generally, the entire authorised capital is not raised from the public.

That part of authorised capital which is issued in the form of shares for public subscription is called the issued capital. Subscribed capital represents that part of issued capital which is actually subscribed by the public. Finally, paid-up capital is that part of the subscribed capital which the subscribers are actually called upon to pay.

Reserve Fund

Reserve fund is the accumulated undistributed profits of the bank. The bank maintains reserve fund to tide over any crisis. But, it belongs to the shareholders and hence a liability on the bank. In India, the commercial bank is required by law to transfer 20 per cent of its annual profits to the Reserve fund.


The deposits of the public like demand deposits, savings deposits and fixed deposits constitute an important item on the liabilities side of the balance sheet. The success of any banking business depends to a large extent upon the degree of confidence it can instill in the minds of the depositors.

The bank can never afford to forget the claims of the depositors. Hence, the bank should always have enough cash to honour the obligations of the depositors.

Borrowings from Other Banks

Under this head, the bank shows those loans it has taken from other banks. The bank takes loans from other banks, especially the central bank, in certain extraordinary circumstances.

Bills Payable

These include the unpaid bank drafts and telegraphic transfers issued by the bank. These drafts and telegraphic transfers are paid to the holders thereof by the bank’s branches, agents and correspondents who are reimbursed by the bank.

Acceptances and Endorsements

This item appears as a contra item on both the sides of the balance sheet. It represents the liability of the bank in respect of bills accepted or endorsed on behalf of its customers and also letters of credit issued and guarantees given on their behalf.

For rendering this service, a commission is charged and the customers to whom this service is extended are liable to the bank for full payment of the bills. Hence, this item is shown on both sides of the balance sheet.

Contingent Liabilities

Contingent liabilities comprise of those liabilities which are not known in advance and are unforeseeable. Every bank makes some provision for contingent liabilities.

Profit and Loss Account

The profit earned by the bank in the course of the year is shown under this head. Since the profit is payable to the shareholders it represents a liability on the bank.

Bills for Collection

This item also appears on both the sides of the balance sheet. It consists of drafts and hundies drawn by sellers of goods on their customers and are sent to the bank for collection, against delivery documents like railway receipt, bill of lading, etc., attached thereto.

All such bills in hand at the date of the balance sheet are shown on both the sides of the balance sheet because they form an asset of the bank, since the bank will receive payment in due course, it is also a liability because the bank will have to account for them to its customers.


According to Crowther, the assets side of the balance sheet is more complicated and interesting. Assets are the claims of the bank on others. In the distribution of its assets, the bank is governed by certain well defined principles.

These principles constitute the principles of the investment policy of the bank or the principles underlying the distribution of the assets of the bank. The most important guiding principles of the distribution of assets of the bank are liquidity, profitability and safety or security.

In fact, the various items on the assets side are distributed according to the descending order of liquidity and the ascending order of profitability. Now, we have to analyse the various items on the assets side.


Here we can distinguish cash on hand from cash with central bank and other banks cash on hand refers to cash in the vaults of the bank. It constitutes the most liquid asset which can be immediately used to meet the obligations of the depositors. Cash on hand is called the first line of defence to the bank.

In addition to cash on hand, the bank also keeps some money with the central bank or other commercial banks. This represents the second line of defence to the bank.

Money at Call and Short Notice

Money at call and short notice includes loans to the brokers in the stock market, dealers in the discount market and to other banks. These loans could be quickly converted into cash and without loss, as and when the bank requires. At the same time, this item yields income to the bank.

The significance of money at call and short notice is that it is used by th

e banks to effect desirable adjustments in the balance sheet. This process is called ‘Window Dressing’. This item constitutes the ‘third line of defence’ to the bank.

Bills Discounted

The commercial banks invest in short term bills consisting of bills of exchange and treasury bills which are self-liquidating in character. These short term bills are highly negotiable and they satisfy the twin objectives of liquidity and profitability.

If a commercial bank requires additional funds, it can easily rediscount the bills in the bill market and it can also rediscount the bills with the central bank. Bills for Collection: As mentioned earlier, this item appears on both sides of the balance sheet.


This item includes the total amount of the profit yielding assets of the bank. The bank invests a part of its funds in government and non-government securities.

Loans and Advances

Loans and advances constitute the most profitable asset to the bank. The very survival of the bank depends upon the extent of income it can earn by advancing loans. But, this item is the least liquid asset as well.

The bank earns quite a sizeable interest from the loans and advances it gives to the private individuals and commercial firms.

Acceptances and Endorsements

As discussed earlier, this item appears as a contra item on both sides of the balance sheet.

Fixed Assets

Fixed assets include building, furniture and other property owned by the bank. This item includes the total volume of the movable and immovable property of the bank.

Fixed assets are referred to as ‘dead stocks’. The bank generally undervalues this item deliberately in the balance sheet. The intention here is to build up secret reserves which can be used at times of crisis.

Balance sheet of a bank acts as a mirror of its policies, operations and achievements. The liabilities indicate the sources of its funds; the assets are the various kinds of debts incurred by a bank to its customers. Thus, the balance sheet is a complete picture of the size and nature of operations of a bank.

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