4. Opening for a group of men have complied with all the requirements of the law, have paid in $100,000 in gold for stock, and have spent $10,000 for furniture and fixtures. The bank's con dition would be as follows: 5. Is capital a stock is placed under the head of liabilities, but it is evidently not the same kind of liability as a promissory note, for there is no maturity date on it, and the stockholder cannot demand its payment so long as the bank is a going concern. If the bank goes out of business, however, the stockholder has a right to his share of all assets re maining after prior claims have been satisfied. Cap ital stock may be called a liability in liquidation or an accountability; it is merely a part of the difference between resources and liabilities as long as the bank is a going concern. Surplus and undivided profits con stitute the remainder of this difference.
A large paid-in capital stock may be properly con sidered an evidence of strength, inasmuch as it means that the stockholders have staked a certain amount upon success of the institution. While cash may be paid originally for the stock, it may soon be spent for any kind of property the bank chooses to buy. It may be spent unwisely; nevertheless, there is always the comforting fact that the stockholders have staked something and that they will try to make the bank a success.
6. A bank is ready for business. Let us suppose that depositors come in and leave $50,000 with the bank in some sort of cash. For our present purposes, it is unnecessary to distinguish be tween gold and other forms of cash. The bank's con dition now is : 7. A far the bank has made no profit. Most of the profits of a commercial bank come from loans and discounts. Suppose some one comes in and borrows $10,000 for three months with interest at six per cent, and leaves half the proceeds of the loan on deposit with the bank, taking the remaining $5,000 away in cash. The bank now stands with: The profit will come when interest is paid on the loan. Of course interest is accruing all the time. Bookkeeping practice varies with different banks.
In some, no account is taken of the profit until the interest is actually paid. In others, the accruing in terest is entered upon the books periodically—every month in some cases. Any adequate bookkeeping system will take account of accruing interest.
8. A discount.—A discount is essentially the same as a loan, the only difference being that interest is taken out of the principal when the loan is made, in stead of being paid at maturity as in the case of or dinary interest. For example, suppose some one wishes to discount his note of $10,000 for sixty day at six per cent. The discount, amounting to $100, is taken out of the principal at once, and $9,900 is left to the borrower. Obviously, the discount is more profit
able to the bank and less profitable to the borrower than is the loan, if the rate is the same in both cases, for the borrower has the use of a smaller. principal and pays just as much as he would for a loan. He gets $9,900 today, and pays back $10,000 at the end of sixty days. If he had made a loan, he would have had the use of $10,000 at a cost of $100.
Here, again, some banks take account of the ac crued earnings, while others do not. Often, the bank enters the entire $100 as profit earned as soon as the discount is made, altho it is not earned altogether until sixty days have passed. Of course this practice is inaccurate. If it is followed, the condition of the bank immediately after the discount is made will ap pear as follows, assuming that all the proceeds are left on deposit: 9. Undivided profits.—Loaning and discounting will go on until a considerable sum is earned. The undivided profits remain in the bank until the di rectors decide what to do with them. So long as the bank is a going concern, stockholders cannot claim these profits until the directors decide to pay them out as dividends. When the directors meet they may choose to pay out only a part of the profits and leave the remainder in the bank as surplus. In fact, the law sometimes specifies that a surplus shall be built up.
National banks are required to carry at least one tenth of their net earnings to a surplus fund until the fund amounts to 20 per cent of the capital. The directors may vote to carry still more of the net earn ings into surplus, if they so desire, and may declare dividends out of any part of the surplus over and above the required twenty per cent.
The paying out of dividends simply diminishes the bank's cash and decreases the amount of undivided profits or of surplus, as the case may be. The bank may place the amount of the dividend on deposit for the stockholders' account. If this is done, deposits will be increased instead of cash being decreased.
10. when a bank begins business it is unable to make enough loans at first to employ all its capital. In fact, it often happens in the history of a bank that surplus cash will be on hand which cannot be loaned safely at a satisfactory rate of interest. The thing to do at such a time is to invest in something which is safe, which yields a fair rate of return, and which can be easily disposed of for cash whenever ready funds are needed. Commercial paper, bonds, stock, real estate, etc., may be bought. Real estate is not a good investment for a bank, be cause it cannot be liquidated easily, so in many coun tries the law prohibits the purchase of it. The buying of stocks is often prohibited, also, because of the fluc tuation in their value.