Question

What is the difference between an asset and a liability on a bank's balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank's balance sheet?

Answer 1

A bank's balance sheet lists its assets and liabilities, with assets representing what the bank owns and liabilities representing what it owes. Net worth, or bank capital, is calculated by subtracting liabilities from assets. A balance sheet must always balance because every transaction has an equal and opposite effect on both sides of the sheet.

Step-by-step explanation:

A bank's balance sheet is an accounting tool that lists its assets and liabilities. An asset is something of value that the bank owns, such as cash, loans made to customers, and bonds. On the other hand, a liability is a debt or obligation that the bank owes, such as deposits from customers and loans from other banks. Net worth, also known as bank capital, is calculated by subtracting the bank's liabilities from its assets.

A balance sheet must always balance because the assets must equal the liabilities plus the net worth. This is because for every transaction that occurs, there is an equal and opposite effect on both sides of the balance sheet, ensuring that it remains in balance.

Major assets on a commercial bank's balance sheet include:

1. Cash held in its vaults
2. Monies held at the Federal Reserve Bank (known as reserves)
3. Loans made to customers
4. Bonds

Claims, or liabilities, on a commercial bank's balance sheet include:

1. Deposits from customers
2. Loans from other banks
3. Debts and other obligations