Adjusting the bank's Reserve position

A rather careful adjustment in reserve position is called for when, as is usually the case for large city banks, the money desk manger seeks to keep a fully invested asset position without involving reserve deficits.if a deposit inflow supplies funds that are expected to be retained by the bank for a considerable period of time, such as several months, then it is to be expected that such short-term funds would enter a longer part of the money market than the federal funds market.such funds would probably be invested in treasury bills, or possibly commercial paper or bankers' acceptances. likewise, a persistent deposit drain will ordinarily be met by selling such securities from the investment portfolio of the bank. But when it seems likely that the increase, or decrease, in fund a rising from changed levels of bank deposits is temporary in character, one might then reasonably expect the large bank to buy or sell federal funds.

Registered Bonds Vs. Coupon bonds

Registered bonds are bonds where the owner of the bond is registered with the issuing company and the owner receive the interest each period directly from the issuer. Most corporate bonds are registered bonds.
if bond is not a registered bond, it is a coupon bond (or bearer bond). in order to receive the interest from a coupon bond, the bond owner must send a coupon to the issuing company. in a coupon bond, the issuing company does not know who owns the bonds, but pays the interest to whoever submits the coupon.

Debenture bonds Vs. Guaranteed bonds

A debenture bond does not have any specific asset supporting the bond as collateral. The bondholders of debenture bonds have a standing equal to general creditors in the case of bankruptcy of the bond issuer.
Other types of bonds are guaranteed in that they have some sort of collateral related to the bonds. This way, if the issuer of the bonds fails to pay the bonds upon maturity, the holder of the bonds can obtain the collateral in settlement of the amount owed to them. Some of these types of bonds are;
Collateral bonds have a specific asset up as collateral. if the issuer defaults on the interest payment or the repayment of the principal, the bondholders can pursue legal action to obtain the collateral.
Guaranty bonds are guaranteed by a third party. for example, a parent company guarantees the bonds that are issued by a subsidiary. in the case of the default by the subsidiary, the parent company has guaranteed performance of the bonds.
collateral trust bonds are bonds that are supported by specific securities of the company. Mortgage bonds are backed by a specific asset and this asset is usually a fixed asset. Subordinated bonds (or junior bonds) are bonds that are supported by collateral, but they have a secondary claim on the collateral. So, if the collateral is not large enough to pay those parties with a primary interest in the property, holders of subordinated bonds will not receive anything from the collateral and will become general creditors.

the bond itself

Bonds will have a stated amount (face value), a stated interest rate, a maturity date and information about when interest is paid. The maturity date is the date on which the issuer will "retire' the bond by paying the face amount of the bond to the bondholder. Below is an example of basic bond information.
-face value $1000
-interest rate 8%
-Issue date January 1,2001
-Maturity Date December 31,2001
-Interest is paid annually on December 31
From this information, we can determine all of the amounts that the issuer will pay to the holder of the bond over the life of the bond. We have already mentioned that on the maturity date the issuer will pay the face amount ($1,000 in this case) to the bondholder. The cash that will be paid as interest every December 31st is also determinable from this information. The cash paid as interest is calculated as the face value multiplied by the stated rate of interest.
For interest in this bond example provided above, the issuer of the bond will pay $80 in cash as interest to the purchaser of the bond every December 31st from December 31, 2001, until December 31, 2001.
On December 31, 2011 (the maturity date), not only will the owner of the bond receive the $80 interest payment, but s\he will also receive $1000, which is the face value of the bond on that date.
The accounting for bonds is easier if we understand what happens over the life of the bond. When a company issues a bond it is in a sense simply borrowing money from someone else, and this money will need to be repaid in the future. Whenever a company borrows money, it should recognize a liability for the amount borrowed. Also, each period, it will need to recognize some amount of interest expense related to the amount that it has, in effect, borrowed. The main issues with bonds relate to the calculation of the selling price (or issuance price) of the bond and the calculation of the amount of interest expense that needs to be recognized each period.
However, before looking at the accounting for the bond, we will look again at the cash flows related to the bond itself. This show we the accounting issues that we need to cover. The three main cash flows are the sale of the bond, interest and payment of the face value at maturity.

Bond and finance

One of the main ways that companies raise cash for financing their operations and other business needs is through the issuance of bonds. Bonds are a main source of debt financing by companies, while the other main source is equity financing through the issuance of shares.
Investors purchase bonds because they pay some amount of interest to the purchaser, and additionally, the face amount of the bond will be paid at the bond maturity in the future.
We will look at bonds from both standpoints (the issuer and the investor), but our focus will be largely on the issuer of the bond and their accounting for the bonds. However, before discussing the accounting for bonds, it is important to make certain that we understand what is happening in respect to a bond, and in particular cash flows associated with the bond.

Unearned Revenue

A liability for Unearned Revenue arises when a customer pays in advance upon receipt of an advance payment from a customer, the company debits cash and credits a liability account such as unearned revenue, or customer's deposits . As the services are rendered to the customers, an entry is made debiting the liability account and crediting a revenue account. notice that the liability for unearned revenue normally is "paid" by rendering services to the creditor, rather than by making cash payments.
unearned revenue ordinarily is classified as a current liability, as the activities involved in earning revenue are part of the business's normal operating cycle.

definition of depreciation

A technical definition of depreciation is the systematic and rational allocation of the costs of a fixed asset over its expected useful life.
In Other words. What depreciation does is match the expense (cost) of acquiring the asset with the revenues that it will generate over its useful life by spreading the recognition of expense of acquisition over the time period during which the asset will be useful (provide revenue) to the company. This is concept of matching.
This is purely mathematical process of dividing in some manner the cost of the asset between the period in which it will be used.

Goodwill and balance sheet

Goodwill is one of the most common examples of intangible assets and is the one item that lacks specific identification. Goodwill is defined as the amount that a purchaser would pay for a company that is greater than the fair value of the net identifiable assets. Purchased goodwill must be reported as a separate line item on the balance sheet. Generally, other intangibles are combined and reported as one figure on the balance sheet.
Goodwill can be acquired or developed internally, but the only goodwill recognized in the accounting records is purchased goodwill. The amount of goodwill purchased is equal to the difference between the purchase price paid and the fair value of the net assets received. Internally generated goodwill is not recorded in the accounting records because it does not meet the definition of an asset. An asset is something that will benefit the company in the future, is owned currently by the company, and was acquired in a past transaction. In the case of internally generated goodwill, because there was no past transaction in which it was acquired, it is not an asset.
A company should record purchased goodwill on the books as an asset at the cost paid for it. Every year the company must assess its goodwill to determine if it has been impaired during the year. The determination of impairment is done the same way as it was for fixed assets-comparing future cash flows with the recorded cost of the asset. If it has been impaired, it must be written down to the fair market value.
If the purchase price is less than the value of the net assets, this is called negative goodwill. This amount of negative goodwill should first be distributed to the non-current assets are reduced to zero; the amount remaining should be classified as an extraordinary gain on the income statement.
The costs of developing or maintaining goodwill are expensed as they are incurred. Examples of these costs are training employees and hiring employees from the purchased company.
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decline in value of fixed Assets and the balance sheet

the fixed assets shown at the debt side of the balance sheet,are those assets that will not be converted into cash within one year or during the operating cycle if the operating cycle is longer than one year.decline in value of fixed Assets ,as covered above, the rule for the recognition of gains and loss associated with discontinued operations is that the gain or loss is recognized in the period when it occurs. this means that expected future losses from operations are recognized only when they have actually occurred. however, one situation is an exception to this. if the company expects to have a loss in the future from the disposal of the assets of the segment (not a loss from operations in the future , but a loss from the sale of the assets), this expected future loss needs to be recognized in the current period. because this loss on the sale of the assets will result from the fact that the expected sales price is less than the book value of the assets, this indicates that the assets are overvalued. Since they are overvalued, the assets must be written down in the current period when this overstatement becomes apparent.remember that is this immediate recognition of future expected loss relates only to expected losses from the sale of assets. expected losses from operations are organized only when they actually occur. Any future expected gains (whether from operations or the disposal of assets ) will be recognized only when they actually occur.

usefulness of the balance sheet

the balance sheet help user in making many processes, such as:
- Evaluating the capital structure.
- Assess risk and future cash flows.
- Analyze the company In terms of liquidity,solvency and financial flexibility.