The following are the bank's liabilities or obligations which are due to its stockholders and creditors.

Capital Stock. At the organization of the bank, its shares are purchased by individuals, who must pay cash for them. The bank thus becomes accountable to the shareholders for the amount of the capital stock and hence it is carried as a liability. The original capital stock may be augmented from the surplus if the earnings of the bank justify this policy. Capital stock is a safeguard to depositors, for the sum which it represents can be applied to settle claims against the bank in case of insolvency.

Surplus. Surplus also may be the result either of payments originally contributed by stockholders or profits gradually accumulated by the bank. Surplus acts as a means of providing additional working capital for expanding the business of the bank, and also operates as a bulwark for meeting possible losses.

Undivided Profits. These are earnings which have not been distributed to stockholders nor carried over to surplus, but retained as a buffer in case of emergency. Capital stock, surplus, and undivided profits are items grouped together under the term "capital investment." All three are closely related, for undivided profits flow into surplus, which in turn may be added to capital stock. In the event that other assets are insufficient to satisfy the claims of creditors, undivided profits are first used, and if necessary the surplus is next attached, while only in an emergency is the capital stock impaired, for such step may bring the bank to dissolution. So the greatest fluctuations occur in the item of undivided profits, and the least in capital stock. The capital investment does not consist of actual cash, but is the result of bookkeeping entries, and merely expresses the excess value of the bank's resources over its liabilities. The same thought is conveyed in the bookkeeping formula: resources = liabilities + net worth of the owners of the business. Thus the two sides of a bank statement are always made to equal each other by either increasing or decreasing the amount of capital investment.

Dividends Unpaid. These have been declared by the bank, but for some reason have not as yet been withdrawn by the shareholders, who have a direct claim on these sums.

Discount Collected but Not Earned. When a bank discounts a customer's note, the interest charge is deducted in advance. The amount is not really earned by the bank until the date when the discounted paper matures. While the bank thus has possession of the sums arising from these discounts, they are not the property of the bank and so are carried as liabilities.

This item is the inverse of the account "interest earned but not collected."

Amount Reserved for Taxes Accrued. A bank, the same as any other corporation, must pay several kinds of taxes. The federal government levies the national income, excess-profits, and usual corporation taxes upon all banks. If a bank issues circulating notes, these instruments are also subject to a federal levy. The state government also taxes bank stock, since it is a form of personal property. All real property, such as bank building and ground, is assessed and taxed by the local government. Although the bank pays these taxes at different times throughout the year, the total amount can be estimated from past payments and a proportionate sum is usually set aside each month to anticipate this expenditure. This item, as well as the two following, are called accrued liabilities.

Amount Reserved for Interest Accrued. Another important item of expense is the payment of interest due to customers on daily balances or on their certificates of deposit, and to others who have loaned money to the bank.

Amount Reserved for Expenses Accrued. A large bank usually compiles a budget covering salaries, supplies, and general expenses of operation. It is thus able to estimate annual expenses and distribute this amount in monthly or weekly installments throughout the entire year.

Circulating Notes Outstanding. National banks are still permitted to issue circulating notes based on the security of certain United States bonds, and this account represents the bank's indebtedness to holders of its notes.

Net Amounts Due to Other Banks, Bankers, and Trust Companies. These institutions are carrying demand deposits with the bank in order to maintain balances against which drafts may be drawn.

Demand Deposits. They are balances left by individuals or corporations and can be withdrawn on demand or on notice of less than thirty days. They are created either through cash deposited by customers or through credit extended by the bank.

Time Deposits. This item includes savings accounts and certificates of deposit which cannot be withdrawn on demand without the consent of the bank, but are payable after the bank has received notice of thirty days.

United States Deposits. Funds derived from postal savings or from internal and external sources of federal revenue are deposited in banks throughout the country.

State, County, and Municipal Deposits. Local governments also use the banks as depositories of funds.

Certified Checks Outstanding. When a bank certifies a check drawn by a customer, it charges the amount to his account and assumes the obligation for payment. The instrument then becomes the direct liability of the certifying bank.

Cashier's Checks Outstanding. These items are drawn by the cashier on the bank itself. Such instruments are used to remit funds, to give borrowers the proceeds of loans, or to pay the general disbursements of the bank.

Bonds Borrowed. These are not the property of the bank, but are borrowed in order to comply with the regulations requiring these securities as collateral for circulating notes or for government deposits.

Bills Payable and Rediscounts. In general, a bill payable is evidence of an unpaid debt which one owes to another. A bank, the same as a corporation, may borrow funds by giving its note, which then becomes a bill payable. On the basis of this instrument, a member bank may receive an advance from the district Federal Reserve bank. This institution will also extend credit indirectly to a member bank by rediscounting certain classes of commercial paper of the latter's customers. Whereas formerly individual banks in the larger centers alone granted accommodation to other banks, since 1914 the Federal Reserve banks have rendered a similar service.

Letters of Credit and Acceptances Outstanding. This account is an offset to the asset, "customers' liability under letters of credit and on account of acceptances." When a bank issues a letter of credit, it agrees to accept the drafts of the seller of the goods. The bank thus assumes a liability to the amount specified in the letter of credit. Drafts accepted by the bank are its obligations and are known as acceptances.