Chapter 9 (Nine) Accounts in brief

Accounts Division

Double entry system:banks follow double entry system in all accounting process. Each transaction must have a debit and a corresponding credit.

Classification of Accounts:

Banks maintain 4 sorts of accounts.eg

1.      Income Account

2.      Expenditure account

3.      Asset account

4.      Liability Account

Income Account:

All types of income are credited in this account. There are many subheads of Income Account ie Investment Income, Commission Income, Exchange Income

Expenditure Account;

All expenses are done by debiting Expenditure Account. There are many subheads of this account, ie Salary and Allowances, Rent, bill.

Asset Account

Various types of asset of bank increases/ decreases by different transactions. After classifying these transactions in various heads, these are recorded in account and it is called asset account. Ie cash account, investment account, furniture and fixtures account, equipment account etc.

Liability Account:

Liability of bank increases/ decreses for transa tions. As per sectors of liability, this type of account is recorded and this is called liability account.ie deposit account, bills payable, dd, tt payable, distributable profit etc.

A=L,

A +(I-E)=L

What comes in ==Debit

What goes out ==Credit

Transaction can be done in two ways:

1.      Cash transaction

2.      Transfer from one account to another

Cash Transaction:

When someone deposits money, cash account will then be debited for it is an asset account and simultaneously another corresponding account will be credited( depositor account).  On the other hand, if someone accepts money, cash account will be credited and contra account will be debited ie Investment account, deposit account, expenditure account etc,

Transfer:

By debiting any liability or asset account, another liability or asset account may be credited. On the other hand, liability and asset account may be debited or credited with each other.

Points to remember,  cash money, cheque, pay order, DD, Bond, TDR, responding IBCA act as debit voucher. On the other hand, Deposit voucher, application of DD,TT, Responding IBDA act as credit voucher.

      Islami Bank General Account

The Account through which inter-branch and Branch-Head Office transaction and vice-versa of Islami Bank Bangladesh Ltd. are being routed is termed as Islami Bank General Account (IBG A/C). Every day huge numbers of transactions are made between the branches and Branches-Head office through IBG A/C.

IBDA & IBCA

Whenever a transaction between inter-branch or Branch-Head office takes place, it is advised to the relevant branch or Head Office through inter branch advices namely IBDA (F-65) i.e. Inter-Branch Debit Advice or IBCA (F-66) i.e. Inter-Branch Credit Advice duly recorded in IBCA/IBDA issued and received register (B-80 & B-50)

Originating Entry and Originating Branch

The entry, which is initiated, first by a branch or Head Office either by debiting or crediting other branch or Head Office is called the originating debit/credit entry as the case may be depending on the original entry, IBDA or IBCA. The branch which initiates the entry is called originating branch.

Responding Entry and Responding Branch

The branch against which the entry is originated is called the responding branch and its entry is responding entry.

Example

Mr. X deposit Tk. 10.00 lac in the Gulshan Br. of IBBL to send it to Khatungonj Br. favoring/in the account of Mr. Y. Accordingly Gulshan Br. issued TT and issued IBCA duly recorded IBCA issue register and Khatungonj Br. paid the money to Mr. Y and responded the IBCA issued by Gulshan Br. Here Gulsan Branch is the originating branch and the entry initiated by the branch is originating entry conversely the Khatungonj Branch is responding branch and the entry passed by it is responding entry.

Reversal entry

For some reason or others an entry may be required to be reversed. Such entry is called reversal entry. If an originating entry is reversed by the originating branch it is called Originating Reversal Entry. When a responding entry is reversed by the responding branch then it is termed as Responding Reversal Entry.

I B General A/C Statement:

(F-185A & F-185B)

In case of IBG A/c, by debit or credit of IBG A/c, one branch become debtor or creditor to another branch.The transaction of Islami Bank General A/c shall have to be reported to reconciliation department of FAD, HO, daily trough IBG A/c Statement in the Head Office’s prescribed format. Thus, after calculating the products of whole months, if any branch become  more in debit in IBG A/c, it becomes Creditor to other branch ( Other branch will pay him) and vice versa if more credit, then the branch becomes debtor ( It will pay others).Profit is given debtor branch to creditor branch. Profit will have to be realized by issuing IBDA on FAD,HO and Profit will have to give by issuing IBCA on FAD, HO.

Reconciliation

•          Reconciliation means ‘settlement’, ‘bringing together’, ‘squaring off’, ‘adjustment’, ‘appeasement’ etc. In banking, reconciliation means matching of inter-branch/Branch-HO transactions. i.e. matching of originating and responding entries relating to IBG A/C.

•          Reconciliation is a work which is done by Head Office, Reconciliation Deptt., Financial Administration Division to check-up whether all entries originated by branch are being responded dully by the contra branch and also to check whether the entries responded by a branch are actually originated by the concerned branch comparing the date of originating entry, Branch code, Advice No. (IBCA/IBDA), transaction code and the Amount through computer.

Un-reconciled Responding entries

Some times Originating entries can not be matched  with the responding entries due to difference in transaction Code, Branch Code and Amount, date of original entry, Advice No.

So, responding branches are to find out the causes of wrong responding. If they find that their responding entries are correct then photocopy of the related Advices (IBCA/IBDA) should be sent to the Reconciliation Deptt., HO for scrutiny and necessary action.

In most cases branches send incorrect information in the statement, so the entry remains outstanding as being un-reconciled.

Originating entries: To be responded

Originating entries “To be responded” means the entry originated by the originating Branch but not yet responded by the responding Branches. In such cases, the Branches intended to respond the advice should be asked for original/duplicate IBCA/IBDA from the originating Branches. On having the Original / duplicate IBCA/IBDA they should respond after checking the previous records thoroughly in order to avoid double responding. If responded twice, that should be duly reversed.

General Ledger:

Though Accounts are four in number, in general ledger, all accounts are posted in two ways ie asset/liability. Income is a debt of bank to owners, so it is posted as Liability in General Ledger. On the other hand, Expenses are a credit of bank to bank’s owners so Expenses are shown as Asset in General Ledger. Here we get profit amount by subtracting Expenses from profit.

Annual Closing Account:

Bank  calculate the profit-loss at the end of the year. Moreover,  banks  prepares a balance sheet to have a true picture of its asset and liability. For doing this, every branch prepares the annual closing account and  send the same to Head Office. Head Office finally prepares the final account of the bank itself. Procedure of preparing Annual Closing Account:

1.       Balance of all accounts are to be ensured initially.

2.       Clearing Adjustment A/C and Transfer Delivery Adjustment A/C balances will have to make zero.

3.       No need of opening new investment account or closing ongoing Investment account.

4.       By debiting Profit payable A/c, depositors account will have to be credited. There will be no balance in Profit Payable A/c. But, as profit is given after fulfilling a year in TDR, BOND and MSS account, those accounts in which one year will not be fulfilled at 31^st December,  proportionate profit of that year will have to be kept in Profit Payable A/C.

5.       Necessary Income Tax and Excise duty ( tax on local production) will have to be deducted from depositors account and will have to be credited to head Office.

6.       As per instruction of Head Office, depreciation has to be determined on furniture and fixture A/c, equipment A/c, that amount of money will have be credited in Head Office by debiting Expenditure Account.

7.       By debiting Expenditure A/c, stationary A/c  will be credited as per usages of the year.

8.       If there is any advance, debit Advance Expense A/c and Credit concerned Expense A/c and in 1^st January, it will be done Vice Versa. On the other hand, if there is any outstanding expense, then debit Expenditure a/C, CREDIT bills payable A/c and in 1^st January, it will be Vice Versa.

9.       Direct Expense on Investment A/c will be transferred in Advance Expense A/c and at 1^st , January it will be vice Versa.

10.   Balance of Compensation A/c will be credited in Head Office.

11.   Credit Income A/c if Debit balance in IBG A/c by debiting FAD, HO as per agreed rate and Vice Versa.

12.   At last, a new Liability account as “Profit-Loss A/c” will have to be opened in Clean cash and General Ledger. Debit this A/c and credit Credit Expense Account and debit Income A/c and Credit this A/c. In this situation, if Credit balance is found in this account, it is the net profit of the branch. Then credit the net profit to FAD by debiting Profit-Loss A/c.

If Debit balance in Profit Loss A/c, then the branch is in loss. Then debit FAD and Credit Profit-Loss A/c. So, at last, there will be zero balance in Profit-Loss A/c.

Example : 31^st December,  2019,

Profit Loss A/c    Debit   Tk- 10

Expenditure A/c Credit Tk 10

Income A/c      Debit   Tk 5

Profit-Loss A/c  Credit  Tk 5

So we get,  Profit- Loss A/c  Debit Tk-10

                   Profit- Loss A/c  Credit     Tk-5

Finally we get debit 5 tk in Profit-Loss A/c. So, branch has incurred Loss 5 Tk.

This can be done Vice Versa.