Accounting for Financial Institutions
Financial Institutions:
Institutional mechanism created by society to channel
saving and other financial services to those individuals and institutions
willing to pay for them.
Importance of Financial Institutions:
There are essentially three types of market at work
within the global economic system:
1- Factor
markets.
2- Product
markets.
3- Financial
markets.
Financial markets, performs a vital function within
the global economic system. The financial markets channel saving to those
individuals and institutions needing more funds for spending than are provided
by their current incomes. The financial markets are the heart of the global
financial system, attracting and allocating savings and setting interest rates
and the prices of financial assets (stocks, bonds, etc.).
Types of Financial Market:
1- Money
market: The
institutions set up by society to channel temporary surpluses of cash into
temporary loans of funds, one year or less to maturity.
2- Capital
Market: The
institutions that provides a channel for the borrowing and lending of long-term
funds (over one year)
Classification of Financial Institutions
1- Depository
Institutions:
-
Commercial banks.
-
Saving and loan associations.
-
Saving banks.
-
Credit unions.
2- Contractual
Institutions:
-
Insurance companies.
-
Pension funds.
3- Investment
Institutions:
-
Investment companies.
-
Money market funds.
-
Real estate investment trusts.
What is Money?
The most important financial asset in the economy is
money. All financial assets are valued in terms of money, and flows of funds
between lenders and borrowers occur through the medium of money. Money itself
is a true financial asset, because all forms of money in use today are claims
against some institution, public or private.
Definition:
Money performs several important function in
the financial system, serving as medium of exchange, a store of value
(purchasing power), a standard for valuing goods and services (unit of
account), and source of liquidity (spending power).
Banks
Banks Accounting:
The main differences in accounting of banks from other
entities are:
1- Money is
the goods that banks deal with.
2- The goods
(money) of the banks are sensitive in nature.
3- No mistakes
in bank transactions are acceptable.
4- The money
that banks deals with belongs to the public.
5- Accounts
kept the in bank system must be accurate and updated.
6- Bank work
is divided into divisions, so it can be done accurately and fast.
7- Each
division in the bank works as a page in the general ledger (subsidiary ledger).
8- Each
division in the bank is controlled by numerous procedures.
Classification of Banks:
Banks can be classified from three types of views:
1- From
Legal view.
-
Public Banks: owned by the government (central, and
national banks)
-
Private Banks: owned by individuals, and who are responsible
for its acts against the central bank.
-
Mixed Banks: owned jointly by government and individuals
or other institutions (controlled by government).
2- From
operational view.
-
Commercial Banks: Perform common banking
business.
-
Industrial Banks: Deals with industrial sector
(lending)
-
Agricultural Banks: Deals with agriculture
sector.
-
Real estate Banks: Providing individuals and
institutions with financial facilities for real estate.
3- From
resources of funds view.
-
Central Banks: An agency of government that has public
policy functions such as monitoring the operation of the financial system and
controlling the growth of the money supply. Central banks ordinarily do not
deal directly with the public; rather, they are "banker's banks,"
communicating with commercial banks and securities dealers in carrying out
their essential policymaking functions.
-
Depository Banks: Financial institutions that
rise loanable funds by selling deposits to the public.
-
Business Banks: Those banks depend on its
own funds and on long term deposits for participating or lending others for
investment projects.
Commercial Banks
Definition:
Commercial bank offers the public both deposit and
credit services, as well as a growing list of newer and innovative services,
such as investment advice, security underwriting, and financial planning. The
name commercial implies that banks devote most of their resources to meeting
the financial needs of business firms. In recent years, however, commercial
banks have significantly expended their offerings of financial services to
consumers and units of government around the world.
Importance of Commercial Banks
1- Banks
hold about one third of the total assets of all financial institutions.
2- Banks are
still the principal means of making payments.
3- The
ability of banks to create money from excess reserves made available from the
publics deposits.
4- Banks are
the principle channel for government monitory policy.
5- Commercial
banks are the financial department stores of the financial system
6- Commercial
banks can offer a wider array of financial services than any other financial
institution, meeting the credit, payment, and saving needs of individuals,
businesses, and governments.
Responsibilities of licensed banks
According to Jordanian authorities, each licensed bank
has the following responsibilities:
1- Its
capital should not go below 20 millions.
2- Each bank
has to deduct 10% of its annual net income as legal reserve, until its equal to
its capital.
3- Each bank
has to keep minimum requirements of liquid assets as stated by central bank,
which should not go below 25% of its deposits.
4- Should be
established with at least 50 members.
5- Bank
should appoint its external auditor who is not in dept to it.
6- To
present it's audited financial statements to central bank within three months
from the end of its financial year.
7- To
present any periodical information as required by central bank.
Accounting information system in commercial
bank:
Accounting information system in commercial bank is a
set of forms, records, means, and procedures used in recording, and preparing
financial statements required by internal and external bodies for decision
making.
To achieve bank aims, management is divided as follow:
1- Managing
bank operation: providing public with the following services:
-
Current accounts (C/A)
-
Letter of credit (LC)
-
Issuance of guarantee.
-
Foreign exchange and transfer.
-
Treasury.
2- Managing
credit facilities: managing loans, and related information.
3- Managing
bank accounts: Which include the following:
-
Book keeping.
-
Preparing financial statements.
-
Following up accounts, and facilities provided.
-
Performing internal audit and control.
4- Managing
branches: Responsible for forming branches in different areas.
5- Managing
researches: responsible for:
-
Preparing studies about bank activities.
-
Issuing legislation, and reports.
-
Studying bank investments. - Managing bank library.
Treasury Division
Treasury division is the most important division in
the bank. It's responsible for all banks in and out cash (Cash store).
Treasury sections:
Treasury is divided into two sections:
1- Main
treasury: were all bank cash are kept. Its responsible for:
-
Giving and receiving cash to and from different
cashiers (beginning and end of day).
-
Giving and receiving cash to and from different
branches (periodical bases).
-
It keeps general journal assistant record to
maintain its activities.
2- Subsidiary
treasury: related to different divisions in the bank.
Note:
A- Head of
the cashiers is responsible for the main treasury, and has assistant officer,
as well other cashiers.
B- The bank
insures all cashiers against the fraud.
Treasury Records:
1- Treasury
general journal assistant: it tracks cash payment and cash receivables of main
treasury, payment cashier, and receivable cashier.
2- Main
treasury statement: shows cash payments and cash receivables of main treasury.
3- Payments
cashier statement: shows cash payments and cash receivables of payments
cashier.
4- Receivables
cashier statement: shows cash payments and cash receivables of receivables
cashier.
Q. No. (1):
1- A bank
started its business on 1/1/2000 with a capital of 7.000.000 JD distributed as
follow:
-
Depositing 2.800.000 JD in central bank.
-
Depositing 1.400.000 JD in main treasury.
-
Depositing 2.100.000 JD in Arabic bank.
-
Depositing 700.000 JD in Al Ahli bank.
2- At the
beginning of the day, main treasury paid 84.000 JD to payment cashier. The
payment cashier paid the following during the day:
-
19.600 JD loans.
-
18.200 JD investments in securities.
3- Receivable
cashier collected the followings during the day:
-
56.000 JD as Current accounts.
-
35.000 JD as long-term deposits.
-
21.000 JD as saving deposits.
4- During
the same day, the bank withdraws 700.000 JD from Arabic bank and deposits it in
central bank.
5- Other
payments done by the bank:
-
21.000 JD for office rent via cash payment
voucher.
-
2.800 JD for petty cash via cash payment
voucher.
-
28.200 JD for purchase of equipments via check
withdrawn on Al Ahli Bank.
-
11.200 JD for repair via cash payment voucher.
-
19.600 JD for registration fees via check
withdrawn on Arabic bank.
Prepare the following:
1- Treasury
general journal assistant.
2- Main
treasury statement.
3- Payments
cashier statement.
4- Receivables
cashier statement.
5- Bank
general journal.
6- Trail
balance.
Q. No. (2):
1- A bank
started its business on 1/1/2000 with a capital of 10.000.000 JD distributed as
follow:
-
Depositing 3.500.000 JD in central bank.
-
Depositing 2.000.000 JD in main treasury.
-
Depositing 3.000.000 JD in Arabic bank.
-
Depositing 1.500.000 JD in Bank of Jordan
2- At the
beginning of the day, main treasury paid 100.000 JD to payment cashier. The
payment cashier paid the following during the day:
-
22.000 JD loans.
-
18.000 JD investments in securities.
3- Receivable
cashier collected the followings during the day:
-
150.000 JD as Current accounts.
-
65.000 JD as long-term deposits.
-
85.000 JD as saving deposits.
4- Other
payments done by the bank:
-
7.000 JD for office rent via cash payment
voucher.
-
13.000 JD for petty cash via cash payment
voucher.
-
40.000 JD for registration fees via check
withdrawn on Bank of Jordan.
Prepare the following:
1. Treasury
general journal assistant.
2. Main
treasury statement.
3. Payments
cashier statement.
4. Receivables
cashier statement.
5. Bank
general journal.
6. Trail
balance.
Q. No. (3):
1- A bank
started its business on 1/1/2005 with a capital of 4.000.000 JD distributed as
follow:
-
Depositing 1.500.000 JD in central bank.
-
Depositing 1.200.000 JD in main treasury.
-
Depositing 300.000 JD in Arabic bank.
-
Depositing 250.000 JD in Bank of Jordan
-
Depositing 750.000 JD in Al Ahli bank.
2- At the
beginning of the day, main treasury paid 240.000 JD to payment cashier. The
payment cashier paid the following during the day:
-
25.000 JD Loans.
-
30.000 JD Current accounts.
-
12000 JD Saving accounts
-
27.000 JD investments in securities.
3- Receivable
cashier collected the followings during the day:
-
460.000 JD as Current accounts.
-
230.000 JD as long-term deposits.
-
150.000 JD as saving deposits.
-
50.000 JD Sale of foreign currency.
4- Other transactions
done by the bank during the day:
-
30.000 JD for purchase of foreign currency via
cash payment voucher.
-
14.000 JD for petty cash via cash payment voucher.
-
6.000 JD for loans collection via cash
receivable voucher.
-
50.000 JD for purchase of office supplies via
check withdrawn on Arabic bank.
-
400.000 JD withdrawn from Al Ahli Bank and
deposited in central bank.
-
50.000 JD withdrawn from central bank and deposited
in main treasury.
Prepare the following:
1. Treasury
general journal assistant.
2. Main
treasury statement.
3. Payments
cashier statement.
4. Receivables
cashier statement.
5. Bank
general journal.
6. Trail
balance.
Current Accounts Division (C/A)
It’s a contract between the bank and its client, were
client can deposit and withdraw financial instruments in and from his account
in any time he wishes.
Duties of current accounts division:
1- Opening
accounts for clients, and providing them with facilities according to bank
policy.
2- Recording
client's deposits and withdrawals in client's records.
3- Controlling
and auditing daily transactions, and sending it to the general accounting
division to record it in the bank general journal.
4- Calculating
daily interest in clients debit current accounts.
5- Preparing
monthly client's statements and receiving their verifications.
6- Verifying
clients accounts balances with the general ledger.
7- Controlling
with attention both debit current accounts, and rigid accounts.
Type of current accounts:
1- Credit
current accounts: according to this type, client can withdraw from his account with a
condition he can't withdraw more than his deposits (his account balance is
always credit.
2- Debit
current accounts: according to this type, the bank allocate a fixed amount of money
(agreed upon) to the client current account, were he can withdraw on account
(his current account may show a debit balance). This type of accounts is one of
bank investment policies, it's known as drawing on account drawing. Bank charges
daily interest on debit balance.
Type of transactions done in current account
division
1- Transactions
of deposits.
2- Transactions
of withdrawals.
3- Transactions
of interest and fees allocations.
1- Transactions
of deposits
A- Cash
deposits:
Normally the cash deposit
takes the following procedures:
-
Filling cash deposit form (3 copies), and
signing it by the client.
-
Presenting the cash deposit form and cash to
the treasury (Receivables cashier).
-
The cashier sends a copy to treasury and a copy
to current accounts division and returns original attested copy to the client.
-
The current accounts division records the
deposit in the client account.
-
At the end of the day the current account
division sends the event to the general accounts division to pass the general
journal entry.
Entry:
Assume Mr. Ahmed deposited 500
JD in his current account No. 2541254.
Treasury A/C 500
Current accounts (No. 2541254)
500
B- Checks
deposits:
There are two types of checks deposits as follow:
a- Depositing
checks withdrawn on same bank.
Normally depositing this kind
of check takes the following procedures:
-
Filling check deposit form (2 copies), and
signing it by the client.
-
Presenting the check deposit form to the
current accounts division.
-
The current accounts division verifies the
signature on the check and availability of balance (if its ok the
current accounts division records the transfer of the check amount between
the two client's current accounts) or retaining the check to the holding client.
-
At the end of the day the current account division
sends the event to the general accounts division to pass the general journal
entry.
Entry:
Assume Mr. Ahmed deposited 1500
JD check in his current account No. 2541254. The check is withdrawn on same
bank on client account No. 3545441.
C/A (No. 3545441) 1500
C/A (No. 2541254) 1500
b- Depositing
checks withdrawn on other local banks:
Normally depositing this kind
of check takes the following procedures:
-
Filling check deposit form (2 copies), and
signing it by the client.
-
Presenting the check deposit form to the
current accounts division.
-
The current accounts division records the
amount in the client current account (holding) and sends the check to the
clearing division.
-
The clearing division sends the check with the
bank representative to the central bank clearing room.
-
The bank representative handle the check to the
other bank representative which checks is withdrawn on.
-
Once the check is cleared its handled back by
the clearing division to the current accounts division and the last free it
from holding.
-
If the check is not passed the current account
division revise the transaction taken place at time of deposit.
-
At the end of the day the current account
division sends the event to the general accounts division to pass the general
journal entry.
Entry:
Assume Mr. Ahmed deposited
3000 JD check in his current account No. 2541254. The check is withdrawn on
other local bank.
At time of deposit:
Clearing division A/c 3000
C/A (No. 2541254)
3000
If it's cleared:
Central bank A/c 3000
Clearing division A/c 3000
If it's not cleared:
C/A (No. 2541254) 3000
Clearing division A/c 3000
2- Transactions
of withdrawals
Normally cash withdrawals take
the following procedures:
-
Filling withdrawal form (withdrawal check), and
signing it by the client.
-
Presenting the form or the withdrawal check to
the current accounts division.
-
The current account division verifies the
client signature and availability of balance, and sending it to the treasury
division (payment cashier).
-
The treasury makes the payment and resend the
attested form or check to the current accounts division.
-
The current accounts division records the
withdrawal in the client current account.
-
At the end of the day the current account
division sends the event to the general accounts division to pass the general
journal entry.
Entry:
Assume Mr. Ahmed withdraw 6000
JD from his current account No. 2541254.
C/A (No. 2541254) 6000
Treasury A/C
6000
3- Transactions
of interest and fees allocations.
Normally the bank charges debit current accounts with daily interest,
and charges all accounts with fees of expenses.
Entry:
Assume that on 1/7/2005 30 JD interest and check issuance fees amounted
14 JD were charged to debit current account No. 545652.
Pass the necessary journal entries as on 31/12/2005.
At time of event on 1/7/2005
Debit C/A (No. 545652) 44
Interest Revenue A/C 30
Check issuance fees
earned A/C 14
At 31/12/2005
Interest Revenue A/C 30
Check issuance fees earned A/C 14
Income Summery A/C 44
Q. No. (1):
The following
transactions took place on 5/8/2005 in Arabic bank:
Current
accounts transactions:
1- 70,000 JD
were deposited by clients via cash depositing forms.
2- 30,000 JD
checks (Same bank) were deposited by clients via checks depositing forms.
(12,000 on C/A, and balance on D/C/A)
3- 4,000 JD
were withdrawn by clients via checks.
Debit current
accounts transactions:
1- 4,200 JD
were deposited by clients via cash depositing forms.
2- 1,100 JD
checks (Local banks) were deposited by clients via checks depositing forms, and
all checks were cleared.
3- 6,000 JD
were cash withdrawn.
4- 300 JD
interest became due.
Note:
Accounts balances
at the start of the day were:
§ Current
accounts 25,000 JD
§ Debit
current accounts 60,000 JD
Prepare the
following:
1- Bank
general journal entries.
2- T
accounts of C/A and D/C/A.
Q. No. (2):
The following
transactions took place on 3/9/2005 at al Arabic bank:
1- The
balance of C/A's were 220,000 JD.
2- Deposits
of clients during the day were:
-
60,000 JD cash.
-
36,000 JD checks withdrawn on other local banks
(30,000 JD were cleared and the balance was rejected due to insufficient funds)
3- 31,000 JD
cash withdrawals.
4- 5,000 JD
Presented by other local banks withdrawn on bank clients (2,000 JD were
rejected due to insufficient funds)
Prepare the
following:
1- Bank
general journal entries.
2- T
account of C/A.
Clearing Division
Normally when bank clients deposit checks withdrawn on
other local banks in their current accounts, their bank takes the
responsibility of collecting it on their behalf.
The bank do this kind of job via the clearing room of
the central bank, were all banks representatives gather every day to maintain
their banks rights and responsibilities related to the checks of their clients.
By adopting the above mechanism the banks avoids:
1- Appointing
to many checks collectors (representatives) from all banks (reduce the cost).
2- Risk of
money collection.
Note:
After each clearing room session, the central bank
updates all banks account balances.
Checks clearing mechanism:
Assume that Jordan bank client deposited 12
checks withdrawn on local banks in his C/A No. 548752 detailed as follow:
-
4 Checks withdrawn on Housing bank (500 JD, 750
JD, 250 JD and 1,000 JD).
-
3 checks withdrawn on Arabic bank (900 JD,
1,600 JD and 5,000 JD).
-
5 checks withdrawn on Amman-Cairo bank (750 JD,
3,000 JD, 3,750 JD, 2,750 JD and 1,250 JD)
At the clearing room the bank representative
received envelops contains the following checks withdrawn on bank clients:
-
3 checks from Housing bank (5,000 JD, 7,000 JD
and 500 JD)
-
4 checks from Arabic bank (200 JD, 400 JD, 150
JD and 250 JD)
-
3 checks from Islamic bank (600 JD, 1,200 JD
and 1,200 JD)
Mechanism:
Step (1):
The client will fill the check deposit form which
might look like the following:
Bank of
Clearing Checks Depositing Form
Account No. (548752) Account
type: C/A
|
|||
S. N
|
Check No.
|
Bank withdrawn on
|
Amount
|
1
2
3
4
5
6
7
8
9
10
11
12
|
Housing bank
Housing bank
Housing bank
Housing bank
Arabic bank
Arabic bank
Arabic bank
Amman Cairo bank
Amman Cairo bank
Amman Cairo bank
Amman Cairo bank
Amman Cairo bank
|
0500.000
0750.000
0250.000
1000.000
0900.000
1600.000
5000.000
0750.000
3000.000
3750.000
2750.000
1250.000
|
|
Total
|
21500.000
|
||
Amount in words:
Twenty one thousand and five hundred
Jordanian dinars.
|
|||
Name of depositor:……… Signature:………
|
|||
Important note:
The mentioned amounts will be recorded in
your accounts, but it does not give you the right to withdraw it until its
cleared by clearing division
|
|||
After presenting this form to current account
division, the division will handle it to clearing division and pass the
following entry:
Clearing division A/C 21,500
C/A
(No. 548752) 21.500
Step (2):
The bank representative and before going to central
bank (clearing room) prepares (Checks handover forms) for each bank separately
as follow:
Bank of
(Checks
handover)
Checks withdrawn on:
(Housing
Bank)
|
Bank of
(Checks
handover)
Checks withdrawn on:
(Arabic Bank)
|
|||
Check No.
|
Amount
|
Check No.
|
Amount
|
|
-----
-----
-----
-----
|
500
750
250
1000
|
-----
-----
-----
|
900
1600
5000
|
|
Total
|
2500
|
Total
|
7500
|
|
Name of receipts:
Signature:
|
Name of receipts:
Signature:
|
|||
Bank of
(Checks
handover)
Checks withdrawn on:
(Amman
Cairo bank)
|
|
Check No.
|
Amount
|
-----
-----
-----
-----
-----
|
750
3000
3750
2750
1250
|
Total
|
11500
|
Name of receipts:
Signature:
|
|
All the above forms will be signed by the other banks
representatives (at the central bank clearing room) after receiving the checks
withdrawn on their banks.
Step (3):
The bank representative fills the presentation form as
follow:
Central bank (Clearing room)
Presentation Form
Name of Bank: Bank of
Session No:………………… Date:…………………… Time:………………
|
|||
No. of checks
|
Checks withdrawn on them
|
Banks name
|
Checks withdrawn to them
|
4
3
5
|
2500
7500
11500
-----
|
Housing Bank
Arabic Bank
Amman Cairo bank
Islamic Bank
|
12500
1000
-----
3000
|
12
|
21500
|
Total
|
16500
|
Balance (Central Bank)
|
5000
|
||
21500
|
Final total
|
21500
|
|
From the above form its clear that checks amount
withdrawn on other banks are more than the checks withdrawn on bank of Jordan
with 5000 JD (Adding it to bank of Jordan account at central bank).
Before the start of the clearing session, ach
representative handle the presentation form of his bank to central bank
clearing room officer.
Step (3):
The central bank clearing room officer prepares the
session form out of the banks presentation forms as follow:
Central Bank (Clearing Room)
Session Form
Session No:………………… Date:………………… Time:………………
|
||||
Bank Name
|
Checks withdrawn on them
|
Checks withdrawn to them
|
Balance
|
|
DR
|
CR
|
|||
Bank of
Housing Bank
Arabic Bank
Amman Cairo bank
Islamic Bank
|
16500
2500
11500
7500
-----
|
21500
12500
-----
1000
3000
|
11500
6500
|
5000
10000
3000
|
Total
|
38000
|
38000
|
18000
|
18000
|
Step (4):
The central bank clearing room officer presents the
session forms to the general accounts section to pass the general journal
entry, and provide each bank representative with a copy of attested
presentation form:
Central Bank General Journal Entry:
Clearing Room A/C 18000
Bank of Jordan
Housing Bank A/C 10000
Islamic Bank A/C 3000
Arabic Bank A/C 11500
Amman Cairo bank A/C 6500
Clearing
Room A/C 18000
Step (5):
Each bank passes its general journal entry according
the attested session form bought back by its representative as follow:
Bank of Jordan
Current accounts A/C 16500
Central Bank A/C 5000
Clearing
A/C 21500
Housing Bank:
Current accounts A/C 2500
Central Bank A/C 10000
Clearing
A/C 12500
Amman Cairo bank:
Current accounts A/C 11500
Central
Bank A/C 11500
Arabic Bank:
Current accounts A/C 7500
Clearing
A/C 1000
Central
Bank A/C 6500
Islamic Bank:
Central Bank A/C 3000
Clearing
A/C 3000
Q. No. (1):
Assume that Arabic Bank clients deposited 20
checks withdrawn on local banks in their current accounts detailed as follow:
-
6 Checks withdrawn on Housing bank (7000 JD, 22000
JD, 73 JD, 16000 JD, 12 JD and 82000 JD).
-
6 checks withdrawn on Islamic bank (1200 JD, 5000
JD, 4500 JD, 1100 JD, 650 JD and 17000 JD).
-
8 checks withdrawn on bank of Jordan
At the clearing room the bank representative
received envelops contains the following checks withdrawn on bank clients:
-
17 checks from Housing bank (5,000 JD each)
-
10 checks from Bank of Jordan (6000 JD each)
-
2 checks from Islamic bank (60000 JD and 85000
JD)
Prepare the
following:
1- Arabic
bank Checks handover forms.
2- Arabic
bank presentation form.
3- Central
bank session Form.
4- Central
bank journal entries.
5- All Banks
journal entries.
Long-term and saving Deposits Division
It’s a long term cash
deposits, deposited by bank clients for fixed periods to gain interest. It's
considered one of the most important recourses for banks to determine its
activities.
Type of long-term deposits:
1-
Fixed long-term deposits: it's deposited for fix
period; in which client can't withdraw it before its due date. If he withdraws
it before the due date, he will have no right for the interest due.
2- Available
long-term deposits: the period is not fixed, client can withdraw any time and it gain low
interest. It's called unstable long-term deposits.
3- Prerequisite
long-term deposits: client can withdraw it but with a prerequisite (period is agreed upon).
Accounting cycle of the
long-term deposit:
1- The
client fill up the long-term deposit for, which is a contract determine the
period and interest rate.
2- The cash might
be deposited in cash or from the client current account.
3- The bank
charge any fees agreed upon.
4- At the
end of the financial period, the bank determines the interest due and allocates
it in long-deposit interest reserve account.
5- Once the
long-term deposit date is due, the bank transfers the accumulated interest from
long-deposit interest reserve account to client long-term deposit account.
6- The
client can withdraw the long-term deposit plus the interest in cash, or it can
be transferred to his current account.
Example:
On 1/8/2004 a client deposited
7500 as long-term deposit. Due date is 1/12/2005. Annually interest is 6%. The
bank charged him 12 JD as deposit fees.
Prepare: 2004 and 2005 general journal
entries assuming all settlements done via the client current account.
Time of deposit (1/8/2004):
Current accounts A/C 7512
Long-term deposit A/c 7500
Long-term deposit fees A/C 12
End of 2004 (31/12/2004):
Determining the interest due
and allocates it in long-deposit interest reserve account
7500 * 6% * 5/12 = 187.5
Long-term deposit interest
exp.A/c 187.5
Long-deposit interest reserve A/C 187.5
Income summery A/C 187.5
Long-term
deposit interest exp.A/c 187.5
Due Date in 2005 (1/12/2005):
Determining the interest due
and allocates it in long-deposit interest reserve account
7500 * 6% *11/12 = 412.5
Long-term deposit interest
exp.A/c 412.5
Long-deposit interest reserve A/C 412.5
Transferring the accumulated
interest from long-deposit interest reserve account to client long-term deposit
account
Long-deposit interest reserve
A/C 600
Long-term deposit A/c 600
Transferring the long-term
deposit plus the accumulated interest to client current account
Long-term deposit A/c 8100
Current
accounts A/C 8100
End of 2005 (31/12/2005):
Income summery A/C 412.5
Long-term
deposit interest exp.A/c 412.5
Q. No. (1):
On 1/6/2002 a client deposited
16000 JD as long-term deposit. Deposit period is Five years. Annually interest
is 10%. The bank charged him 62 JD as deposit fees.
Prepare: 2002 to due date general
journal entries assuming all settlements done via cash.
Q. No. (2):
On 1/9/2000 a client deposited
16000 JD as long-term deposit. Deposit period is eleven years. Annually
interest is 15%. The bank charged him 110 JD as deposit fees.
Prepare: 2000 and due payment year
general journal entries assuming depositing settlements done via cash and
payment settlement done via client current account.
Commercial Papers Division
Commercial papers division is
one important source of bank investments opportunities. The commercial paper is
a form of contract between two commercial parties (seller and buyer) in which
buyer promise to pay for goods or services in certain day.
The bank may play three rolls:
1- Collecting
the commercial papers on behalf of its clients.
2- Discounting
the commercial papers for its clients.
3- Lending
clients (loan) with a guarantee of the commercial papers.
1- Collecting
the commercial papers on behalf of its clients
The bank works as an agent on behalf of the client to collect the
commercial papers on due date.
Example:
Assume that a client presented commercial papers amounted 35,000 JD to
bank of Jordan
Prepare the general journal entries as per the followings:
1- If the
bank collected the commercial papers fully on time.
2- If the
commercial papers were rejected fully.
3- If
6000 were rejected and the client did not wish to protest.
4- If
6000 were rejected and the client wish to protest, and bank charged 50 JD as
protest fees, and 17 JD as bank protest fees.
Time of
handling the commercial papers to the bank for collection:
C/P presented for
collection A/C 35000
C/P Owners A/C 35000
Current accounts
A/C 65
C/P Collection fess A/C 65
1- If the
bank collected the commercial papers fully on due date:
Treasury 35000
C/P collected on client behalf A/c 35000
C/P collected on
client behalf A/c 35000
Current accounts A/C 35000
C/P Owners A/C 35000
C/P presented for collection A/C 35000
2- If the
commercial papers were rejected fully:
C/P Owners A/C 35000
C/P presented for collection A/C 35000
3- If
6000 were rejected and the client did not wish to protest:
Treasury 29000
C/P collected on client behalf A/c 29000
C/P collected on
client behalf A/c 29000
Current accounts A/C 29000
C/P Owners A/C 35000
C/P presented for collection A/C 35000
4- If
6000 were rejected and the client wish to protest, and bank charged 50 JD as
protest fees, and 17 JD as bank protest fees:
Treasury 29000
C/P collected on client behalf A/c 29000
C/P collected on
client behalf A/c 29000
Current accounts A/C 29000
C/P Owners A/C 29000
C/P presented for collection A/C 29000
Current accounts
A/C 67
Protest fess A/C 50
Bank protest fees A/C 17
2- Discounting
the commercial papers for its clients
Some times if the
bank client needs the amount of the commercial paper before the due date, he
can ask his bank to discount it.
In this kind of facilities the bank charge the client
for any agreed fees and discount percentage, and the bank becomes the owner of
the commercial papers, but it will stay client responsibility if it's rejected.
Example:
Assume on
1/1/2006 a bank agreed to discount commercial papers amounted 35,000 JD with 6%
discount interest and 20 JD collection fees.
Prepare the
general journal entries as per the followings:
1- On due
date the bank were able to collect 29,000 JD, and charged 50 JD as protest
fees.
2- On
3/5/2006 the bank collected the balance.
3- Both
clients have current accounts at same bank (Owner of C/P Account NO. AAA and who
is drawn on Account NO. BBB).
Time of
agreement:
C/P Discounted
A/C 35000
C/P Discount Interest A/C 2100
C/P Collection fess A/C 20
Current accounts (AAA) A/C 32880
Due Date:
Current accounts
(BBB) A/C 29000
C/P collected on client behalf A/c 29000
C/P collected on
client behalf A/c 29000
C/P Discounted A/C 29000
Current accounts
(AAA) A/C 6050
C/P Discounted A/C 6000
Protest fess A/C 50
3/5/2006
Current accounts
(BBB) A/C 6000
C/P collected on client behalf A/c 6000
C/P collected on
client behalf A/c 6000
Current accounts (AAA) A/C 6000
3- Lending
clients (loan) with a guarantee of the commercial papers
Some times the
bank can lend the client a percentage of the commercial papers amount and keep
those papers as grantee for the loan granted.
Example:
Assume that a bank agreed to grant a loan for a client
(70% of his commercial papers amounted 50,000 JD); the bank charged 260 JD as
collection fees and 200 JD as loan interest.
Prepare the
general journal entries as per the followings:
1- If the
bank collected the commercial papers fully on time.
2- If 20000
were rejected and client did not wish to protest.
Time of
agreement:
C/P Loan guarantee A/C 50000
C/P Owners A/C 50000
Loan A/C 35000
C/P Collection fees A/C 260
Loan interest fees A/C 200
Current
accounts A/C 34540
1- If the
bank collected the commercial papers fully on time.
Treasury 50000
C/P collected on client behalf A/c 50000
C/P collected on
client behalf A/c 50000
Loan A/C 35000
Current accounts A/C 15000
C/P Owners A/C 50000
C/P Loan guarantee A/C 50000
2- If
20000 were rejected and client did not wish to protest:
Treasury 30000
C/P collected on client behalf A/c 30000
C/P collected on
client behalf A/c 30000
Loan A/C 30000
Current accounts
A/C 5000
Loan A/C 5000
C/P Owners A/C 50000
C/P Loan guarantee A/C 50000
Question:
The following is transaction related to Amman
Cairo Bank:
1- On
1/1/2006 the bank provided the client with debit current accounts facilities
with a limit of 15000 JD on account.
2- On
1/1/2006 his account balance was 2000 Debit.
3- On
22/1/2006 he withdraws 3500 JD cash.
4- On
15/2/2006 he deposited a check withdrawn on bank of Jordan
5- On
15/3/2006 a check was received from clearing division amounted 9350 JD.
6- On
1/4/2006 the bank agreed to transfer 6000 JD from his account to long term
deposit for one year with 7% interest and charged hem 40 JD fees (interest is
calculated at the end of each month).
7- On
1/5/2006 he presented commercial papers for collection, amounted 24000 JD, its
due on 1/11/2006, and the bank charged hem 65 JD as collection fees.
8- On
1/6/2006 the bank agreed to discount 14000 JD of the commercial papers for 10%.
9- On
1/11/2006 the commercial papers were rejected fully and the client did not wish
to protest.
10-
On 1/12/2006 the bank told the client that he
is overdrawn and he must manage his account.
11-
On 31/12/2006 he asked the bank to cancel the
long term deposit account and he covered the balance in cash to manage his
account.
Prepare:
1- 2006
general journal entries
2- Client
current account T account.
Answer:
22/1/2006
Current accounts A/C 3500
Treasury 3500
15/2/2006
Clearing division A/C 350
Current
accounts A/C 350
Central bank A/C 350
Clearing
division A/C 350
15/3/2006
Current accounts A/C 9350
Clearing division A/C 9350
Clearing division A/C 9350
Central
Bank A/C 9350
1/4/2006
Current accounts A/C 6040
Long-term
deposit A/c 6000
Long-term deposit fees A/C 40
30/4/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
1/5/2006
C/P presented for
collection A/C 24000
C/P Owners A/C 24000
Current accounts
A/C 65
C/P Collection fess A/C 65
31/5/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
1/6/2006
C/P Owners A/C 14000
C/P presented for collection A/C 14000
C/P Discounted
A/C 14000
C/P Discount Interest A/C 1400
Current accounts A/C 12600
30/6/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
31/7/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
31/8/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
30/9/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
31/10/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
1/11/2006
C/P Owners A/C 10000
C/P presented for collection A/C 10000
Current accounts
A/C 14000
C/P Discounted A/C 14000
30/11/2006
Long-term deposit interest exp. A/c 35
Long-deposit interest reserve A/C 35
31/12/2006
Long-term deposit A/c 6000
Current accounts A/C 6000
Long-deposit interest reserve A/C 35
Long-term deposit interest
exp. A/c 35
Treasury 940
Current
accounts A/C 940
31/12/2006 (Closing entries)
Long-term deposits fees A/C 40
C/P collection fees A/C 65
C/P Discount interest fees A/C 1400
Income
summary A/C 1505
Current
Account
DR
|
CR
|
||
Balance 1/1/2006
Treasury
Clearing division
Long-term deposit
Long-term deposit fees
C/P Discounted
|
2000
3500
9350
6000
40
14000
|
Clearing division
C/P Discounted
Balance as on 1/12/2006 C/F
|
350
12600
21940
|
Total
|
34890
|
Total
|
34890
|
Balance 1/12/2006 C/D
|
21940
|
Long-term Deposit
Treasury
Balance as on 31/12/2006 C/F
|
6000
940
15000
|
Total
|
21940
|
Total
|
21940
|
Balance 1/1/2007 C/D
|
15000
|
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