Accounting for Financial Services- JAIBB

BANKING DIPLOMA EXAMINATION

Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB) 

Accounting for Financial Services- JAIBB

Introduction to Accounting

Q.1. What is meant by Accounting? Give two objectives of Accounting.
Ans. According to the American Institute of Certified Public Accountants (AICPA) in theirAccounting Terminology Bulletin No. 1, “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events
which are, in part at least, of a financial character and
interpreting the results thereof.”

Two objectives of Accounting are:—

(i) To keep systematic records: Its main objective is to keep complete record of business transactions. It avoids the possibility of omission and fraud.

(ii) To calculate profit or loss: Accounting helps to ascertain the net profit earned or loss suffered on account of business transactions during a particular period. To ascertain profit or loss at the end of each accounting period Trading and Profits & Loss of the business is prepared.

Q.2. What do you mean by Accounting Concepts?

Ans. Accounting Concepts provide a base for accounting process every enterprise has to consider basic concepts at the time of preparing its financial statements. According to Kohler concept as, “A series of assumptions constituting the supposed basis of a system of thought or an organized field of an endeavour.

Q.3. What is separate entity concept?
Ans. According to this concept, the business and businessman are two separate and distinct entities.Business is treated as a unit separate and distinct from its owners, managers and others. Therefore,proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. It is applicable to all forms of business organizations, i.e., sole proprietorship, partnership or a company.

Q.4. What do you understand by going concern concept?
Ans. According to this concept it is assumed that the business will continue to exist for a long period in the future. According to this concept we record fixed assets at their original cost and full cost of the asset would not be treated an expense in the year of its purchase itself.

Q.5. What do you understand by convention of consistency?
Ans. According to this convention accounting principles and methods should remain consistent from one year to another. The rationale for this concept is that changes in accounting treatment would make the Profit & Loss and Balance Sheet unreliable for end users. For example there are several methods of providing depreciation on fixed assets i.e. fixed installment method, diminishing balance method etc., But it is expected that the business entity should be consistent to follow accounting method.

Q.6. Explain Accounting Equation.
Ans. Accounting equation is also termed as balance sheet equation. It signified that the assets of a business are always equal to the total of capital and liabilities.

It can be represented as:
                                       Assets = Liabilities + Capital
                                       Capital = Assets + Liabilities

Short: Question-Answer

Q.1. Give advantages of Accounting.

Ans. Advantages of accounting are:—

(i) Provides Complete and Systematic Record: In business there are so many transactions therefore it is not possible to remember all transactions. Accounting keeps a systematic record of all the business transactions and summarized into financial statements.

(ii) Information Regarding Financial Position: Accounting provides information about the financial position of the business by preparing a balance sheet at the end of each accounting period.

(iii) Helpful in Assessment of Tax Liability: Accounting helps in maintaining proper records. With the help of these records a firm can assessed income tax of sales tax. Such records are trusted by income tax and sales tax authorities.

(iv) Information Regarding Profit or Loss: Profit & Loss Account is prepared at the end of each accounting period to know the net profit earned or net loss suffered at the end of each accounting period.

Q.2. Give limitations of Accounting.

Ans. Limitations of Accounting are:—

(i) Possibilities of Manipulation: Accounts can be manipulated, so that the financial statements may disclose a more favourable position then the actual position for example closing stock may be overvalued in accounts.

(ii) It includes only Economic Activities: Non-monetary transactions are not recorded in accounts.    Transactions which can not be expressed in money cannot find place in accounts. Qualitative aspects of business units like management abour relations, efficiency of management etc. are wholly omitted from the books of accounts.

(iii) Price Level Changes not Considered: Fixed assets are recorded in accounts at their original cost. Sometimes assets remain undervalued particularly land and building. Effect of price level changes is not considered at the time of preparing accounts.

(iv) Influenced by Personal Judgments: An accountant has to use his personal judgment in respect of many items. For example, it is very difficult to predict the useful life of an asset.

Accounting for Financial Services-JAIBB

BANKING DIPLOMA EXAMINATION

Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

   Accounting for Financial Services- JAIBB

Accounting for Money and Banking

In these notes we will find the following topics:
 
I.     Bank balance sheets 
II.   T-accounts
III.  Areas of bank management  

I. BANK BALANCE SHEETS

Balance sheets are the standard accounting tool for listing a bank's assets and liabilities, which is all that a bank's balance sheet is.  Drawing one up is fairly simple:
-- Step one:  Draw a big lower-case "t." 
-- Assets (how the bank uses its funds) go on the left side.
-- Liabilities (sources of funds, or how the bank gets its funds) go on the right side.
 You may have seen a similar table in introductory macro.  The numbers in parentheses are the proportions of the total.

ASSETS	LIABILITIES + BANK CAPITAL
Reserves (cash on hand or stored with Fed) (1%)	DEPOSITS (checking 5% + savings & CDs 56% = 61%)
Cash items in the process of collection (2%)	Borrowings (loans from other banks and nonbanks) (21%)
Securities (government and other bonds, mortgage-backed securities) (23%)	Other liabilities (including borrowings from foreign sources) (8%)
LOANS to firms, individuals, etc. (65%)
Other assets (9%)	Bank capital ( = Total assets - Total liabilities) (10%)
--------------------------------------------------------	--------------------------------------------------------
TOTAL ASSETS (100%; $11.2 trillion in March 2008)	TOTAL LIABILITIES + BANK CAPITAL (100%; $11.2 T)

For the balance sheet to "balance," the two sides must add up to the same amount.  However, a healthy bank will not have equal amounts of assets and liabilities, but will instead have more assets than liabilities.

                              Assets - Liabilities = Bank capital (or Net worth)

What we do to make the two sides equal is to add Bank capital to the Liabilities side.  (Note that it now bears the heading "Liabilities + Bank Capital."  Bank capital could be either equity (shares of stock in the bank) or retained earnings.

We normally list the most liquid items first.  (The general rule is to list items in descending order of liquidity.)

On the asset side, then, the first item on a bank's balance sheet is reserves, which banks keep to meet deposit outflows (withdrawals, checks drawn on the bank, etc.) and because they're required to do so by the Fed.

-- Banks are required by the Fed to hold a certain proportion of their deposits as reserves, mainly to guard against "runs on the bank" and to allow the Fed to manipulate the money supply. Reserves can be held either as cash or in accounts at the Fed.  Currently, the required reserve ratio (RRR) is 10% on checking accounts and zero on savings and money-market accounts.

The difference between a bank's total reserves and its required reserves is its excess reserves:
excess reserves (ER) = actual reserves - required reserves
                                     = actual reserves - (.10)(checking deposits)

Excess reserves are mainly kept by banks as a precaution. In good times, banks generally try to keep as few excess reserves as possible, since they earn no interest on them. The Fed's reserve requirements are typically much higher than what banks actually need in order to be able to handle deposit outflows. 

II. T-ACCOUNTS

... are a modified form of balance sheets, useful for examining how a bank reacts to changes. Instead of laboriously listing all of the bank's assets and liabilities, T-accounts list only the changes in the bank's assets and liabilities.

For example, suppose I won the NCAA basketball pool and get paid with a check for $100, drawn on Prof. Spizman's account at the Key Bank, and deposit it into my checking account at Pathfinder Bank.  The initial change, before the check clears, to my bank's balance sheet will be as follows:

Pathfinder Bank, BEFORE Check Clears
 

ASSETS (A)	LIABILITIES (L)
Cash items in the process of collection + $100	Checking deposits + $100

At Key Bank, before the check clears there is no change on Key's balance sheet, because Key has no way of knowing that someone has written a check on a Key account. They don't find out about that until the check has gone to the New York Fed to be cleared.

After the check clears, the change in Pathfinder Bank's balance sheet is just a bit different, and Key's balance sheet will be a lot different:

Pathfinder Bank, AFTER Check Clears
 

ASSETS (A)	LIABILITIES (L)
Reserves at Fed + $100	Checking deposits + $100

 If the reserve requirement is 10%, the bank has an increase in excess reserves of --?
      (Change in) excess reserves = total reserves - required reserves
                                                 = $100 - (10%)($100)
                                                 = $100 - $10 = $90

It will probably loan out those excess reserves, so as to earn interest on them.

Key Bank, AFTER check clears
 

ASSETS (A)	LIABILITIES (L)
Reserves at Fed  - $100	Checking deposits   - $100

The change in Key's excess reserves is negative, since only $10 had to be held as reserves against those $100 in checking deposits yet $100 cash is now gone. So if the bank had zero excess reserves before, it would now have excess reserves of -$90 (= -$100 -(-$10)), or a reserve deficiency of $90. To obtain that $90, the bank would have to borrow some funds from the Fed or another bank, borrow from a corporation (repo), sell off some of its assets (e.g., T-bills), issue commercial paper, or call in some of its loans. Of those options, calling in some of its loans (usually accomplished by simply not renewing short-term loans) is the one the bank likes least, because its loans are its most profitable business -- a bank, after all, makes a profit by obtaining funds at a relatively low interest rate (zero on basic checking accounts) and loaning them out at much higher interest rates . Also, the customer whose loan is called in will have to take his business elsewhere, and might do so permanently; since banks hate to lose good customers, they generally avoid calling in loans early.

III. AREAS OF BANK MANAGEMENT

Going down a typical balance sheet, we can note four different areas of primary concern to a profit-maximizing, risk-averse bank management team. A bank's managers have to keep track of four different primary areas:

(1) LIQUIDITY MANAGEMENT: make sure the bank has just enough cash reserves and liquid assets to meet (net) deposit outflows and its reserve requirements at the Fed.
-- Here we see the usual risk-return relationship.  Reserves don't pay interest, so keeping too much in the way of reserves reduces the bank's overall profitability.  But holding just the bare minimum of reserves exposes the bank to liquidity risk, i.e., the risk of failing to meet its Fed reserve requirements or being unable to meet an unexpectedly large deposit outflow.

(2) ASSET MANAGEMENT: acquire assets (loans, securities) with acceptably low risk and high return.
-- Several types of risk come into play here. 
---- First, there is credit risk, or default risk -- the possibility that some of the loans owed to the bank won't be repaid, or that some of its bonds and other securities might default.
---- Bank loans and bond holdings are also subject to interest-rate risk-- the possibility that market interest rates might go up, causing the bank's fixed-rate loans to lose value.
------ Because interest-rate risk is particularly severe on household mortgages, which typically have a length of 30 years, banks tend to sell their mortgages off as quickly as possible, to government agencies like the Federal National Mortgage Association (which buy them up and repackage them as securities to sell to the public).
---- (In addition, especially for banks that are active in financial derivatives markets, there is trading risk, or market risk, if, say, a derivatives contract ends up obliging the bank to sell a financial instrument for less than it paid for it.)
-- As with household investors, banks can reduce some of their risk through diversification, e.g., by making different kinds of loans and holding securities of varying maturity lengths.

(3) LIABILITY MANAGEMENT: acquire funds (deposits, borrowings) at low cost
-- A good combined yardstick of asset and liability management together is the bank's interest-rate spread: the difference between the average interest rate at which the bank loans (earns) money and the interest rate at which the bank borrows (pays) money.
-- Interest-rate risk comes into play here as well.  Higher interest rates can deal a bank a double-blow -- the PDV of the bank's long-term fixed-rate loans and bonds takes a beating, while the bank has to pay higher interest rates to its depositors in order to be competitive.

(4) CAPITAL ADEQUACY MANAGEMENT: decide how much capital (net worth) the bank should have and acquire it
-- Capital adequacy management is similar to liquidity management. Just as a bank may hold excess reserves to guard against unexpected deposit outflows, it needs to have a decent cushion of funds -- specifically, a large enough excess of assets compared with its liabilities -- to protect it from an unexpected drop in the value of its assets, since virtually all of its loans carry at least some risk of default.
---- A bank with negative bank capital is insolvent.
-- Banks are required by federal authorities to meet certain minimum capital requirements. The level of bank capital can be either too high or too low: too much bank capital dilutes the shareholders' equity, thus reducing their returns (i.e., their return on equity), whereas too little puts the bank at risk of insolvency.
-- In the economic crisis of 2008-2009, bank capital is absolutely crucial, because many banks appear to be insolvent, especially those that had large quanitities of mortgage-backed securities among their assets.  Those securities have lost much of their value, so probably a good many banks that held them are now insolvent.  But virtually nobody knows the exactvalue of those securities, as there's not much of a market for them at present (winter 2009) -- hedge funds and various bargain hunters are willing to buy them at rock-bottom prices, but banks would rather hold onto them than sell them for so little.  So depending on how one calculates the values of those mortgage-backed securities, a particular bank might still be solvent or it might not.

A simple way to memorize the four areas of bank management: just remember the acronym "LALC"
-- for Liquidity management, Asset management, Liability management, and Capital adequacy management.

Q: A bank sells a 1-year CD for $100,000, at an interest rate of 3%.  It uses the proceeds to buy $100,000 worth of 10-year Treasury bonds paying 6%.  What would happen if all interest rates rose by 2 percentage points the next day?  (What kind of risk has the bank exposed itself to?) A: The PDV (and hence the balance-sheet value) of those long-term bonds would drop sharply if market interest rates rose by 2%.  This would lower the value of the bank's assets.  On the liabilities side, the PDV of the 1-year CD would drop, too, but not by as much, because the PDV's of short-term interest-bearing assets are less affected by interest-rate changes than are the PDV's of long-term bonds.  (In other words, long-term assets have more interest-rate risk than short-term assets.)  The value of the bank's assets would decline more than the value of the bank's liabilities, which is bad news for the bank.

List of Commercial Banks in Bangladesh with Website Address

BANKING DIPLOMA EXAMINATION

Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

List of Commercial Banks in Bangladesh with Website Address

Organisation	Web Link
AB Bank Limited	http://www.abbank.com.bd
Agrani Bank Limited	http://www.agranibank.org
Al-Arafah Islami Bank Limited	http://www.al-arafahbank.com/
Bangladesh Commerce Bank Limited	http://www.bcbl-bd.com
Bangladesh Development Bank Limited	http://www.bdbl.com.bd
Bangladesh Krishi Bank	http://www.krishibank.org.bd
Bank Al-Falah Limited	http://www.bankalfalah.com
Bank Asia Limited	http://www.bankasia-bd.com
BASIC Bank Limited	http://www.basicbanklimited.com
BRAC Bank Limited	http://www.bracbank.com
Citibank N.A	http://www.citi.com/domain/index.htm
Commercial Bank of Ceylon Limited	http://www.combankbd.com
Dhaka Bank Limited	http://www.dhakabank.com.bd
Dutch-Bangla Bank Limited	http://www.dutchbanglabank.com
Eastern Bank Limited	http://www.ebl-bd.com
EXIM Bank Limited	http://www.eximbankbd.com
First Security Islami Bank Limited	http://www.fsblbd.com
Habib Bank Ltd.	http://www.habibbankltd.com
ICB Islamic Bank Ltd.	http://www.icbislamic-bd.com/
IFIC Bank Limited	http://www.ificbankbd.com
Islami Bank Bangladesh Ltd	http://www.islamibankbd.com
Jamuna Bank Ltd	http://www.jamunabankbd.com
Janata Bank Limited	http://www.janatabank-bd.com
Mercantile Bank Limited	http://www.mblbd.com
Mutual Trust Bank Limited	http://www.mutualtrustbank.com
National Bank Limited	http://www.nblbd.com
National Bank of Pakistan	http://www.nbp.com.pk
National Credit & Commerce Bank Ltd	http://www.nccbank.com.bd
One Bank Limited	http://www.onebankbd.com
Premier Bank Limited	http://www.premierbankltd.com
Prime Bank Ltd	http://www.prime-bank.com
Pubali Bank Limited	http://www.pubalibangla.com
Rajshahi Krishi Unnayan Bank	http://www.rakub.org.bd
Rupali Bank Limited	http://www.rupali-bank.com
Shahjalal Bank Limited	http://www.shahjalalbank.com.bd
Social Islami Bank Ltd.	http://www.siblbd.com
Sonali Bank Limited	http://www.sonalibank.com.bd
Southeast Bank Limited	http://www.sebankbd.com
Standard Bank Limited	http://www.standardbankbd.com
Standard Chartered Bank	http://www.standardchartered.com/bd
State Bank of India	http://www.statebankofindia.com
The City Bank Ltd.	http://www.thecitybank.com
The Hong Kong and Shanghai Banking Corporation. Ltd.	http://www.hsbc.com.bd
Trust Bank Limited	http://www.trustbank.com.bd
United Commercial Bank Limited	http://www.ucbl.com
Uttara Bank Limited	http://www.uttarabank-bd.com
Woori Bank	http://www.wooribank.com

Source: Bangladesh Bank Website

Operating profit of Commercial Bank in Bangladesh comparing 2011 & 2010

BANKING DIPLOMA EXAMINATION
Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

Operating profit of Commercial Bank in Bangladesh comparing 2011 & 2010

Operating Profit Comparison

Source : Media News

FOURTH SEMESTER B.E. 2012 Summer Examination Timetable Nagpur University

FOURTH SEMESTER B.E. 2012 Summer Examination Timetable Nagpur University | Summer 2012 Exam Timetable Nagpur University | RTMNU BE Summer 2012 Exam Timetable

FOURTH SEMESTER B.E. 2012 Summer Examination Timetable Nagpur University

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First Year B.E. Summer 2012 Exam Time table

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Principles of Economics & Bangladesh Economy

BANKING DIPLOMA EXAMINATION

Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

Principles of Economics & Bangladesh Economy-JAIBB
 

Q.5 What is a Demand Curve?

Ans.: Meaning : Demand Curve is simply a graphic representation of demand schedule. It expresses the
relationship between different quantities demanded at different possible prices of the given commodity.

(i) Individual Demand Curve : The graphic representation of Individual
Demand is known is Individual Demand Curve.

 

Thus individual demand curve is the one that represent different quantities of a commodity demanded by a consumer at different prices.
(ii) Market Demand Curve : The graphic representation of market demand
schedule is known as Market Demand Curve.
Thus market demand curve is the one that represents total quantities of a commodity demanded by all the consumers in the market at different prices. It is the horizontal summation of the individual demand curves.

 

Fig.(i) shows A’s Demand Curve, fig.(ii) shows B’s Demand Curve and fig. (iii) shows the Market Demand Curve. Thus by adding the different points on individual demand curves one get the market Demand Curve.

Q.6 Why do Demand Curve slopes downwards?

Ans.: Reasons are :-

(i) Law of Diminishing Marginal Utility : The law of demand is based on the law of diminishing marginal utility which states that as the consumer purchases more and more units of a commodity, the satisfaction derived
by him from each successive unit goes on decreasing. Hence at a lesser price, he would purchase more. Being a rational human beings the consumer always tries to maximize his satisfaction and does so equalizing the marginal utility of a commodity with its price i.e. Mux = px.

 It means that now the consumer will buy additional units only when the price falls.

(ii) New Consumers : When the price of a commodity falls many consumers who could not begin to purchase the commodity e.g. suppose when price of a certain good ‘x’ was Tk. 50 market demand was 60 units now when the price falls to Tk. 40, new consumers enter the market and the overall
market demand rises to 80 units.

(iii) Several Use of Commodity : There are many commodities which can be put to several uses e.g. coal, electricity etc. When the prices of such commodities go up, they will be used for important purpose only and their demand will be limited. On the other hand, when their price fall they are used for varied purpose and as a result their demand extends. Such inverse relation between demand and price makes the demand curve
slope downwards.

(iv) Income Effect : When price of a commodity changes, the real income of a consumer also undergoes a changes. Hence real income means the consumer’s purchasing power. As the price of a commodity falls the real income of a consumer goes up and he purchases more units of a commodity eg. Suppose a consumer buys units wheat at a price Tk. 40/kg now, when the price falls to Tk. 30/kg. his purchasing power or the real
income increase which induces him to buy more units of wheat. 

(v) Substitution Effect : As the price of a commodity falls the consumer wants to substitute this good for those good which now have become relatively expensive e.g. among the two substitute goods tea and coffee, price of tea falls then consumer substitutes tea for coffee. This is caused the ‘Substitution effect’ which makes the demand curve sloped downwards.

In a nutshell, with a fall in price more units are demanded partly due to income effect and partly due to substitution effect. Both of these are jointly known as the ‘price effect’. Due to this negative price effect the demand curve slopes downwards.

Q.7 What are the exceptions to the Law of Demand?

Ans.: Exceptions to the law of demand refers to such cases where the law of demand does not operate, i.e., a positive relationship is established between price and quantity demanded.

(i) Giffen Goods : Sir Giffen made an interesting observation in 1845 during famine in Ireland. When price of potatoes went up, poor people purchased more quantity of potatoes instead of less quantity as expected
from the law of demand. The reason was that between two items of food consumption meat and potatoes- potatoes were still cheaper, with the result that the poor families purchased more of potatoes and less of meat. This is known as Giffen effect which is seen in cheap necessary foodstuffs. Again, the word ‘Giffen’ is not synonymous with ‘inferior’. It simply refers to those goods which have a positive relationship with price.

(ii) Conspicuous Goods or Goods of Ostentation

(iii) Conspicuous Necessities

(iv) Future Expectations About Prices

(v) Change in Fashion

(vi) Ignorance

(vii) Emergency