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A Short Note on Bank Credit & Accountancy

Credit Creation - Different Accounting But Same Substance When banks 'lend' to a borrower, they pass the following entry in their books, Dr. Loans & Advances a/c (new asset created) Cr. Demand Deposits a/c (new liability of same amount created) The direct meaning of the above entry is that banks do in fact create deposits in every act of lending. Now, this is not the case of bookkeeping practice determining the true economic nature of the event (despite what some Modern Monetary Theorists would say). Rather, the said money creation would theoretically still occur at the individual bank level even when the accounting would not permit the bank to create deposits through this above entry. Consider a situation where the bank passes the entry in the following manner for loans advanced, Dr. Loans & Advances a/c (new asset created) Cr. Cash Reserves a/c (existing asset of same amount reduced) Here, we are reducing a liquid asset (being the banker's balances of highly liqui...
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On Depreciation Reserves & Non-GAAP Earnings

Capital Maintenance - Why is a Depreciation Expense Required? Economic calculation requires the entrepreneur to calculate his profits accurately so as to ensure he does not appropriate any amounts from earnings as dividends, in excess of the amount needed to maintain the income and scale of the enterprise. A key component in the profit & loss statement is the depreciation expense debited in respect of property, plant & equipment employed in production. This expense is not an actual cash outflow; rather it is an estimate of the reserves needed to finance future capital outlays. Maintenance of capital is one of the fundamental principles in many accounting standards frameworks. The sustenance of any enterprise relies on its capacity to produce earnings that are consistent (roughly) year-in and year-out. If the entrepreneur deceives himself and shows excess earnings, he might start drawing sums as dividends out of capital, and eventually putting his enterprise at danger. For when ...
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