Final answer:
A balance sheet is an accounting tool listing assets and liabilities, used by individuals and businesses, including banks, to showcase financial standing. Assets signify ownership that can generate income or value, whereas liabilities refer to owed debts. Bank capital is the net worth of the bank calculated by subtracting liabilities from assets.
Step-by-step explanation:
A Bank's Balance Sheet
A balance sheet is a fundamental accounting tool that lists an entity's assets and liabilities. Assets are items of value that an individual or business owns, which can be used to produce something or generate income. For instance, cash available can be used to pay for expenses such as tuition, and owning a home is considered an asset as well. Conversely, liabilities represent debts or obligations that need to be paid off, like a mortgage on a house.
A bank's balance sheet also reflects these principles, albeit on a much larger scale. On this balance sheet, assets include cash in vaults, reserves held at the Federal Reserve, loans made to customers, and investments such as bonds. Liabilities could encompass customer deposits and any money the bank has borrowed. The difference between a bank's total assets and total liabilities is known as the bank's net worth or bank capital.
Notably, balance sheets are commonly structured in a two-column T-account format, which divides assets and liabilities. This is essential for stakeholders to evaluate the financial health and stability of the bank.