Jennifer Putnam | Econ 4312_70
Summary 10.1: Understanding the Bank Balance Sheet
A balance sheet is, “a statement that shows an individual’s or firm’s financial position on
a particular day” (Hubbard, 281). The balance sheet layout is derived from the accounting
equation. The accounting equation is Assets = Liabilities + Shareholder’s equity.
Individuals deposit funds into banks to protect against theft, to accrue interest, and to
maintain liquidity. These funds become part of the bank’s liabilities because they are obligated to
return the money to the individuals. The deposit funds also become available for the bank to use
to invest or to make loans to borrowers. Checkable deposits, or transaction deposits, are
“accounts against which depositors can write checks” (282). The two most important categories
are demand deposits and NOW deposits. Demand deposits do not pay interest and NOW
accounts do. Checkable deposits must be paid on demand. “Banks offer nontransaction deposits
