Final answer:
A loan or mortgage loan is recorded as an asset on a bank's balance sheet and affects its assets and net worth over time. The value of this asset can be determined by what it could sell for in the secondary loan market. Loans impact the balance sheet's composition, altering both assets and liabilities.
Step-by-step explanation:
Impact of Loans on the Balance Sheet:
When a family takes out a mortgage loan, the financial impact on the bank's balance sheet is immediate. The loan is considered an asset, as it represents a legal obligation for the borrower to make payments over an agreed period, typically 30 years in the case of a mortgage. As the borrower repays the loan, the bank's asset value increases cumulatively due to the received payments, while initially, its cash or reserves decrease. The actual present value of the loan could be measured by what it might fetch in the secondary loan market, where such assets are traded among financial institutions.
When discussing the balance sheet's liabilities, a loan is not immediately seen as such. However, when a bank grants a loan, it may use deposits (which are a liability) to fund it. Therefore, while the loan increases assets, it also decreases another asset - the cash or reserves - unless the bank uses other funding sources. Consequently, there is a direct correlation between loans and the change in a bank's balance sheet composition, affecting both assets and liabilities. As time progresses and the loan is repaid, the asset's value and the bank's net worth typically increase, assuming no defaults and stable or favorable interest rates.