Accounting & Finance for Bankers
Accounting & Finance for Bankers
This domain tests double-entry accounting, final accounts, bank reconciliation, provisions and reserves, NPA accounting and basic bank financial analysis. Questions often require a journal entry, a profit calculation or interpretation of ratios.
Core rules and concepts
- Every transaction has two aspects: debit and credit. Assets and expenses increase with debits; liabilities, capital and income increase with credits.
- Accrual accounting records income when earned and expenses when incurred, not when cash moves. Matching and prudence support provisions for expected losses.
- Capital expenditure creates an asset; revenue expenditure is charged to profit and loss. A provision is a charge against profit for a known liability or diminution in value; a reserve is an appropriation of profit.
- Bank reconciliation explains differences between the cash book and passbook: cheques issued but not presented, cheques deposited but not cleared, bank charges, interest and errors.
- An NPA is a loan overdue for more than 90 days; income on NPAs is recognized on a cash basis rather than accrued.
- CRAR = eligible capital ÷ risk-weighted assets. It measures capital adequacy, not liquidity.
Worked example
A bank reports interest income ₹120 crore, interest expense ₹70 crore, operating expenses ₹25 crore and provisions ₹10 crore. Net interest income = 120 − 70 = ₹50 crore. Operating profit = 50 − 25 = ₹25 crore. Profit before tax = 25 − 10 = ₹15 crore. If earning assets are ₹1,000 crore, net interest margin = 50 ÷ 1,000 = 5%. With 30% tax, profit after tax = 15 × 0.70 = ₹10.5 crore.
Traps
Do not deduct provisions before calculating operating profit. Do not confuse a provision with a reserve. NPA interest is not accrued as income. Depreciation is a non-cash charge, so it affects profit but not cash flow by itself.