If a depositor overdraws his account, the drawee bank may exercise its discretion at paying the amount. If allowed the drawer's account (his Deposits) is wiped out, and the bank has a presumptive claim against the drawer for the deficit, which it lists among its assets as Overdrafts. Cash is reduced by the face amount. If this check had been presented through a cor respondent bank the Due from Banks would be reduced by the face amount.
In the case of the issue of bank notes by a national bank, the issuing bank must first buy or borrow United States bonds to pledge with the United States Treasury as security; this re duces Cash and increases Investments, or else puts among the liabilities Bonds Borrowed and adds to Investments. The National Bank Law requires that a redemption fund of 5 per cent of the notes issued also be kept in gold at Washington; this reduces Cash but adds a new item, Redemption Fund, to the assets. The bank notes come to the paying teller, and he puts them into the Cash of the bank, and an equivalent liability, Bank Notes Outstanding, appears in the statement. Whenever any of the notes are presented to the bank for redemption, Cash in the statement is unaffected, for one form of cash is simply sub stituted for another; but when presented at Washington for re demption, the Redemption Fund is reduced and Bank Notes Outstanding is also reduced.
If Undivided Profits becomes large, the directors may decide to increase Surplus and declare dividends. Then Undivided Profits will be reduced at once by the amount put into surplus and dividends; the dividends will be carried temporarily as Div idends Declared but Unpaid; when paid, this item will dis appear and Cash be reduced.
If the book values of certain assets are found too high, because they were originally overvalued or have meanwhile depreciated or have proved uncollectible, and it is necessary to scale down the valuations, the asset, Investments, or Loans and Discounts, or Real Estate, Buildings, Fixtures, or whatever asset it may be, is reduced, and Undivided Profits is reduced a like amount.
The local bank may be pressed for funds, and be forced to borrow from its correspondent on the basis of its promissory note secured by discount paper from its note pouch. Its Cash and Due from Banks will be increased and Bills Payable will then appear among its liabilities.
The bank may issue letters of credit by which it agrees to accept certain drafts or bills of exchange drawn upon it. Later when these are presented for acceptance, the bank will incur specific liability for Acceptances. These liabilities are equalized by the introduction of the corresponding assets, Customers' Liability Under Letters of Credit, and Customers' Liability for Acceptances Executed. The nature of these operations will be detailed in a later chapter (see Volume V, Chapter LXI.
Typical Bank Statement The combined effect of these and other transactions is to render the statement into that of a typical commercial bank.
There is, however, no uniformity of style or titles in the published statements, whether of the same or different classes of banks. Uniform accounting is somewhat promoted by gov ernment supervision of banks and the requirement of periodic reports. Nevertheless in the publication of their financial statements wide variation occurs because bankers have different conceptions of what constitutes a good report, because the statements are adapted to different clienteles, and because the bankers have different motives to serve. These purposes arc attained by combining items under varying heads. The fol lowing is a typical statement of a small bank.
Clearings and Collections In the process of executing the functions of loan, discount, deposit, and note issue, and of the incidental business of the bank, there come into its possession numerous forms of credit items which must be presented to the respective debtors for payment. Preliminary, however, to a discussion of the various operations performed by a bank with this end in view, involving as it would an explanation of clearing house procedure and out-of-town collection methods, consideration should be given to the factors that determine when a credit instrument will be presented for payment.
There are various factors which determine when a credit instrument will be presented for payment. These include the question whether the item has a fixed maturity, whether it bears interest, whether it can be used as a medium of exchange or as bank reserve, and whether the law requires presentment within a certain time.