How The Profits Accumulate

A good understanding of how the profits accumulate can be arrived at by taking as an illustration the discounting of a note or bill at any one of the branches. Let us say the note is for $1,000, the discount, commission, etc., charged by the bank, $18.20; the proceeds credited to the borrower's account, $981.80. In that case the bank has an asset of $1,000 in the note which it owns, and it has assumed a liability of $981.80, or parted with that amount of hard cash. In either event the effect is to swell the surplus of assets over liabilities by exactly $18.20. This process goes on at all the branches, the swelling of the surplus assets being offset, of course, by the expenses and interest paid out. During the quarter or half-year the surplus assets of the branches, taken as a whole, steadily increase. At the end of the term the profits are to be transferred to head office. In treating of the branches it has already been explained that before transferring the profits each branch must reserve the rebate or unearned interest on its discounts, and the interest accrued, but not yet paid, or demanded, on its deposits.

Debtor And Creditor Branches

It has already been hinted that a number of branches have deficits to transfer instead of profits regularly when the time for closing the books comes round.

Some of them are regarded nevertheless as very profitable branches. When an office or branch holds $400,000 in deposits and is only able to put out in discounts $150,000 it is quite probable that the result each year will be a deficit. It is so because the interest paid on the larger amount of deposits, along with the expense of running the office, exceeds the branch's earnings. But, of course, if it does not itself use all the $400,000 it holds on deposit the balance not needed is transferred to head office, to be held available for the requirements of other branches, where the demand for discounts regularly exceeds the deposits. Quite a number of the bank head offices seek to equalize the position of their branches by allowing in each case a certain rate per cent on the amount of the average balance supplied by the branch for use of other branches, and contrariwise by charging a certain rate per cent against the branch that uses the money of other branches. Where this is not done the head office makes allowances in its own records for the position of each class of branch. It considers that the debtor branches are doing well if they transfer profits that amount to a satisfactory rate per cent on the average capital used by them, and that the creditor branches are satisfactory if the deficit amounts to a suf-ficiently low annual percentage on the average capital supplied by the branch.

Arriving At The Net Profit

At the branches the transferring of the profit simply consists in the branches debiting their profit and loss accounts and crediting head office, and vice versa In the case of a deficit. So there will be a number of each kind of entries received at head office.

When head office has arrived at its own profits, the net is arrived at by calculating the difference between the total credits and total debits. The effect of the transfer is to vest in head office the disposal of the surplus assets accumulated during the term. The amount is carried to profit and loss account in the head office general ledger.