Final answer:
To calculate the bank’s net worth, list assets (reserves, government bonds, and loans) and liabilities (deposits) on a T-account balance sheet and subtract liabilities from assets. The bank's net worth is found to be $220, reflecting the bank's equity in its balance sheet.
Step-by-step explanation:
Understanding the T-account Balance Sheet and Net Worth
To understand a bank’s financial position, we create a T-account that represents its balance sheet. The left side of the T-account will list the bank's assets, which include reserves and loans made to customers and investments such as government bonds. The right side will list the bank’s liabilities, mainly comprising its customers’ deposits.
- Assets:
- Reserves: $50
- Government Bonds: $70
- Loans: $500
- Liabilities:
To calculate the bank’s net worth, also known as equity, we subtract the total liabilities from the total assets:
Net Worth = Assets - Liabilities
Net Worth = ($50 + $70 + $500) - $400
Net Worth = $620 - $400
Net Worth = $220
Therefore, the bank's net worth is $220, which indicates the bank's own equity in its balance sheet. This equation also demonstrates a key principle of accounting: that a firm's assets must equal the sum of its liabilities and net worth.