Final answer:
The term related to the concept of turning assets into cash and settling liabilities is known as Accrual Basis. Assets on a balance sheet are expected to be turned into cash, while liabilities are settled, which is crucial for bank capital and dealing with the asset-liability time mismatch.
Step-by-step explanation:
The term that describes the concept where it is assumed that assets will be converted into cash and liabilities will be settled is known in accounting as accrual basis.
On a balance sheet, assets such as receivables are recorded based on the expectation that they will be collected, thus turning into cash.
A balance sheet, which is a fundamental accounting tool, lists both assets and liabilities, providing a snapshot of a company's financial condition at a specific point in time.
Banks use this principle when they factor into their planning the assumption that some borrowers may not repay their loans in full or on time, an aspect referred to as the riskiness of assets.
This is all part of the asset-liability time mismatch, where banks face the challenge that customer deposits can be withdrawn in the short term while the repayment of loans, considered as assets, occur over a longer period.
Bank capital, which can be thought of as the bank's net worth, is therefore affected by the performance of these assets. During tough economic times, such as a recession, banks may experience a higher than expected rate of loan defaults, which can significantly reduce their assets and thereby decrease their net worth.