Question

Using and representing a balance sheet, show what happens when Bob opens a checking account with $200 at Bank of America.

Answer 1

We know that

Assets=Liabilities+Capital.

This is the formula on which all balance sheets are made.

The assets are items that the bank owns. This includes loans, securities, and reserves. Liabilities are items that the bank owes to someone else, including deposits and bank borrowing from other institutions. Capital is sometimes referred to as “net worth”, “equity capital”, or “bank equity”. Bank capital are funds that are raised by either selling new equity in the bank, or that come from retained earnings (profits) the bank earns from its assets net of liabilities.

In our case, no Capital is given. So for us the balance sheet will only contain Assets and liabilities.

When a person deposits money in the account, the bank does 2 entries. One on the asset side and one on the liabilities side. the new money is an asset to the bank. On the other hand, the bank will have to pay the money back to the depositor one day, so the deposit is a liability. Usually a bank gives out loans to people from the deposits it has. It also keeps some money in reserve, as required by the central bank.

Since no other detail is given, for now lets assume that the bank keeps the money deposited as cash reserve. In that case, the balance sheet looks like as shown below

Assets Reserves & cash items Liabilities Checkable deposits $200 $200

The balance sheet always has same amount on assets and liabilities side (we can say it is 'balanced'). We can see that the deposit creates additional $200 on both sides.