In this article we will discuss about the different services rendered by banks. They are:- 1. Advances 2. Acceptances, Endorsements and Other Obligations 3. Bill for Collection 4. Bills Payable 5. Bills Purchased and Discounted 6. Rebate on Bills Discounted.
A bank gives a loan to a customer by a fixed advance on a loan account. The whole amount of the loan is withdrawn by the customer immediately and it is repayable after a fixed period. Interest on loan account is payable on the entire amount till paid off.
The customer may be allowed to overdraw his current account with or without security if he requires temporary accommodation. This arrangement like cash credit is advantageous from the customer’s point of view as he is required to pay interest on the actual amount used by him.
(iii) Cash Credits:
Cash credit is a system of lending by which the customer’s account is credited in the books of the banker against which cheques may be drawn. Interest is charged only on the amount of credit availed of by the customer. This is just like an overdraft arrangement with a difference, that is, whereas there is an existing account in the case of an overdraft, but a new account is opened in the name of the customer in the case of cash credit.
Cash credit may be described as an inverse current account. In the latter case, the customer deposits money but in the former case, the banker creates a deposit in favour of the customer. For the banker, one is borrowing and the other is lending.
2. Acceptances, Endorsements and Other Obligations:
A bank has better credit status than its customer. Credit of a bank is more acceptable than that of its customers. Therefore, a bank is often requested by its customers to accept or endorse bill of exchange on their behalf or give a guarantee of repayment of loans raised by its customers.
To safeguard the interest of a bank, the bank may require the customers to deposit a security for an appropriate amount against a guarantee, or an acceptance or endorsement by the bank on behalf of the customers. The bank usually keeps a separate register of bills accepted and endorsed on memorandum basis together with the details of securities deposited by customers.
If the customer fails to meet the bill, the bank will sell the security and reimburse itself. Any shortfall has to be written off as bad debt.
The sellers of goods draw bills and hundis on their customers and send them to their bankers for collection against delivery documents like lorry receipts, railway receipts, bills of lading etc. The particulars of these bills are properly recorded in a separate book known as “Bills for Collection Register”.
Bills sent for collection do not form a transaction to the banker and hence they are not entered in any book of accounts, until cash is actually realised from the concerned parties. On receipt of cash, the Cash Account is debited with full amount received and the Customer’s Current Account is credited after deducting the bank’s commission.
4. Bills Payable:
Bankers provide instruments like demand drafts, telegraphic transfers, mail transfers and traveller cheques for remitting funds from one place to another. All such instruments which are outstanding are shown as bills payable. Bankers’ cheques are issued by banks for payments of their own and also when customers request the same in lieu of cash.
5. Bills Purchased and Discounted:
The banks also give advances to their customers by discounting their bills. Net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bills with or without any security from the debtor in addition to one or more persons already liable on the bill. Customers offer to a bank bills receivable for outright purchase or discounting.
When the bank purchases or discounts the bill, the amount of the bill less discount charge is credited to the account of the customers, the discount charged is credited to the Discount Account and the full amount of bill is debited to Discounted Bills Account. At the end of the year, the outstanding amount of all such bills is shown as Bills Purchased and Discounted in Schedule 9 of the Balance Sheet.
6. Rebate on Bills Discounted:
This refers to unexpired Discount. This can also be called by other names such as, “Discount Received in Advance,” “Discount Received but not Earned”. Its treatment is the same as that for Interest Received in Advance. Rebate on Bills Discounted Account, like Interest Received in Advance Account, is a personal account in nature.
Rebate on Bills Discounted, if appears in the Trial Balance, is taken to the Balance Sheet on the Liability side. However, if adjustment has to be done after preparation of the Trial Balance in respect of Rebate on Bills Discounted, the amount of such Rebate, i.e., unearned Discount will be deducted from the total Discount in the Profit and Loss Account and will also appear as a liability in the Balance Sheet.