By convention, assets are on the left hand side and liabilities on the right. Capital (a/k/a equity, retained earnings, net worth, etc.) are also on the right hand liability side. You could conceive of capital as a special form of liability due the shareholders. You could also conceive of the asset side as representing things owned by the entity in its own right, and the liability side (true liabilities + capital) as amounts due to others. In your bank example, yes, the $1 million would be in capital. On the asset side it would be offset by cash, bank buildings and equipment, etc. When you accepted your first deposit (a $1,000 check deposited in a checking account) it would be debited as $1,000 to an asset account called 'checks in process of collection" and credited to the liability account "demand deposits". (Debits increase assets, credits increase liabilities, and vice versa.) In a couple of days when the check cleared the funds would be moved from checks in process of collection to cash, both asset accounts.
A really surprising result is the accounting when a bank makes loans. It debits the asset account "loans" and credits the borrowers checking account, a liability. This is how the banking system functions to create our money supply. Peter Hollings -----Original Message----- From: [email protected] [mailto:[email protected]] On Behalf Of Bill Lear Sent: Tuesday, May 12, 2009 5:29 PM To: [email protected] Subject: [Pen-l] Question on T Accounts I'm reading Randy Wray's book on money, and took a detour through Heilbroner and Galbraith's *The Economic Problem*. On p. 335, they introduce the notion of a "T account" and say, regarding assets and liabilities: "it is obvious that the two sides of the balance sheet must always come to the same total. *The total of assets and the total of liabilities are an identity*." (emphasis in original) I'm trying to work through some examples based on some of Wray's writings and I'm having trouble understanding how T accounts work when, to me, it appears you can have assets with no corresponding liability, and the identity mentioned above falls apart. For example, let's say I purchase some land, and a bank building, and have $1 million in cash with which to open a bank. I put the cash in the vault and open my doors for business, ready to prey upon ... uh serve the public. At this point, before any other accounts have been opened, what does the T account for the bank look like? The assets would be the $1 million, but what are the liabilities? Would it be my ownership stake, i.e., shares of the company that I own? Bill _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
