Peculiar and significant features of accounting system in banks

The general structure of the accounting system and financial statements for banks isn’t that much different from a regular business. However, there are significant differences in the sub-classification of accounts. Banks need to deal with various complex issues like Technological disruptions, Cybersecurity threats, Regulatory compliance, Talent management, Geopolitical and economic uncertainties, etc. Therefore, such issues have multiple sub-categories in their accounting system, ensuring accurate financial reporting, regulatory compliance, risk management, and efficient banking operations.

The following are the main features of a bank’s accounting systems:
1) Entries in the personal ledgers are made directly from the vouchers
2) From such entries in the personal ledgers each day summary sheets in total are prepared which are posted to the control accounts in the general ledger.
3) The general ledger’s trial balance is extracted and agreed upon every day.
4) All entries in the personal ledgers and summary sheets are checked by persons other than those who have recorded entries. It helps in the detection of mistakes.
5) A trial balance of detailed personal ledgers is prepared periodically and gets agreed upon with the general ledger control accounts.
6) Two vouchers are prepared for every transaction not involving cash.

Here’s a detailed overview of the significant features of accounting systems in banks:

Double-Entry System: Like all accounting systems, banks use the double-entry system, which ensures that every financial transaction has equal and opposite entries in different accounts. This system helps maintain accuracy and consistency in recording financial information.

Positive or negative balance: Broadly, accounts that hold credit balances are referred to as deposit accounts, and accounts opened to hold debit balances are referred to as loan accounts. Some accounts are categorized by the function rather than the nature of the balance they hold, such as savings accounts, which routinely are in credit. Some accounts can switch between credit and debit balances in the Current Account.

Chart of Accounts (COA): Banks have a comprehensive chart of accounts that includes various categories for assets, liabilities, equity, income, and expenses specific to banking operations. It’s a key part of a business’s accounting, bookkeeping, and financial reporting.

• Account types: The main account types of banks are assets, liabilities, equity, revenue, and expenses.
• Account codes: Each account is assigned a unique code, often a leading digit, to indicate its type like SB, Current Account, Deposits account, Cash Credit account, Loan account, Government account, etc. For example, a bank assigns code 01 for the SB account, 02 to the Current account, 03 to the Deposit account 04 to the Cash Credit account, 05 to the loan account, 06 to the PPF account, etc. You may find 15 digits account number in your passbook, chequebook, etc. These 15 numbers indicate the Branch code and type of account code followed by your account numbers.

Multi-Currency Transactions: Banks deal with international transactions and multiple international currencies. Banks are equipped to handle transactions involving different currencies and provide mechanisms for currency conversion and valuation in their accounting system.

Loan and Credit Management: The accounting system in banks tracks all the details of loan accounts like dates of loan disbursement, repayments, interest accruals, and provisions for loan losses in compliance with regulatory requirements.

Contingent Liabilities: Contingent liabilities are recorded as journal entries, with a credit to the accrued liability account and a debit to an expense account. So for a banking scenario, normally a contingent liability could be bills receivable or bills for collection. The contingent liabilities in bank records include future contracts, Acceptance, endorsement, and guarantee on behalf of the customer, Liability for bill rediscounted, disputed liabilities, Income tax under appeal, Income tax deposits, and Claims not acknowledged as debt. Pending lawsuits, product warranties, guarantees on debts, potential fines or penalties, government probes, etc. also recorded as contingent liabilities. Contingent liabilities are recorded as journal entries, with a credit to the accrued liability account and a debit to an expense account.

Financial Instruments Management: Banks deal with a variety of financial instruments like derivatives, securities, bonds, and other financial products. The accounting system of banks trails the valuation, trading, and settlement of these instruments.

Risk Management: The business of banking is confronted with multiple numbers of risks viz. credit risk, liquidity risk, operational risk, reputation risk, legal risk, market risk, strategic risk, country risk, counter-party risk, contractual risk, Access risk, systemic risk, and so on. Nevertheless, like in any other business risk-taking in banking is also inevitable as it also presents possibilities of a rewarding result. The risk management modules help banks evaluate their exposure and comply with risk management regulations.

Regulatory Compliance: Banks are subject to stringent regulatory reporting requirements. Accounting systems are designed to generate reports that meet regulatory standards and provide the necessary data for regulatory submissions.

Income Recognition and Interest Calculation: Banks may recognize income on an accrual basis in respect of standard accounts under implementation and may not recognize income in respect of NPAs. The accounting system calculates interest income, accruals, and recognizes income based on specific accounting standards and regulatory guidelines.

Interest on doubtful debts treated in a bank: When a loan advance becomes bad and doubtful, interest due on such loan is not credited to the P/L Account. Instead, the interest suspense account is credited. Unlike an interest account, an interest suspense account is not credited to a P/L Account. If any portion of interest suspense is realised in the subsequent year, then that portion will be credited to the interest account and subsequently credited to P/L Account.

Ceiling and monitoring of cash transactions: As per RBI guidelines on  Banks are required to issue travellers cheques, demand drafts, mail transfers, and telegraphic transfers for Rs.50,000 and above only by debit to customers’ accounts or against cheques and not against cash (Circular DBOD.BP.BC.114/C.469 (81)-91 dated April 19, 1991). Further, the applicants (whether customers or not) for the above transactions for amounts exceeding Rs.10,000 should affix a permanent (Income tax) account number on the applications (Circular DBOD.BP.BC.92/C469-76 dated August 12, 1976). Since KYC is now expected to establish the identity of the customer and as the issue of demand draft etc. for Rs.50,000 and above is by debit to account, the requirement for furnishing PAN stands increased uniformly to Rs.50,000/-. Further, banks are required to keep a close watch on cash withdrawals and deposits for Rs.10 lakhs and above in deposit, cash credit, or overdraft accounts and keep a record of details of these large cash transactions in a separate register. (RBI Circular No. DBOD.BP.BC.57/21.01.001/95 dated May 4, 1995). Moreover, Branches of banks are required to report all cash deposits and withdrawals of Rs.10 lakhs and above as well as transactions of a suspicious nature with full details in fortnightly statements to their controlling offices. Besides, controlling offices are also required to appraise their Head offices regarding transactions of a suspicious nature. (RBI Circular no. DBOD.BP.BC.101 /21.01.001/95 dated September 20, 1995). The computerization of customer accounts and branch reporting will facilitate the prompt generation of such reports.

Customer Relationship Management (CRM): Some banking accounting systems integrate with CRM software to manage customer information, interactions, and preferences, enabling personalized services and enhanced customer relationships.

Real-Time Reporting: Accounting systems in banks often provide real-time or near-real-time reporting to support decision-making, risk assessment, and regulatory compliance.

Internal Controls and Audit Trails: The purpose of an audit trail is to reduce errors, fraudulent activities, and unauthorized system access, improve internal controls, and verify the accuracy of underlying accounting transactions flowing to financial statements. The accounting system in banks maintains detailed records of all transactions and activities, allowing for traceability and accountability.

Security and Data Protection: Data protection in the banking sector is safeguarding sensitive information from loss, damage, or corruption. It’s important to protect data because data breaches can make customers lose trust in financial institutions. A weak cybersecurity system can amount to data breaches that could easily cause its customer base to take its money elsewhere. Given the sensitive nature of financial data, the accounting systems in banks incorporate robust security measures to protect sensitive information and prevent unauthorized access.

Integration with different Systems: Banking accounting systems integrate with software systems like core banking, treasury management, and regulatory reporting systems to ensure seamless operations and data flow.

Consolidated Reporting: For banks with multiple branches or subsidiaries, accounting systems allow for consolidating financial data from different locations into a single set of financial statements.

Data Analytics and Business Intelligence (BI): Advanced banking accounting systems may include Data analytics and business intelligence (BI) capabilities that help banks make better decisions, improve operations, and increase customer satisfaction. They allow banks to understand customers, detect fraud, improve operational efficiency, comply with regulations, forecast future trends, manage risk, and improve customer experience.

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