One of the most important topics in Module B Financial Statements and Core Banking Systems is the Balance Sheet Equation. Understanding this topic not only helps in solving computation questions but also strengthens your grasp of how banks manage their funds. In simple terms, the balance sheet equation shows that everything a bank owns is funded either by borrowing or by its own capital. This blog will give you clear, easy-to-understand notes on this essential topic.
Why is the balance sheet equation important for JAIIB exam?
The balance sheet equation forms the foundation of accounting for banks. Every bank’s balance sheet follows the basic principle: Assets = Liabilities + Capital. Assets represent what the bank owns, liabilities are what the bank owes, and capital is the bank’s own money or reserves. In JAIIB exams, questions often involve computing one component when the others are given, so mastering this equation is crucial.
Download the free Balance sheet equation Notes for JAIIB exam
The direct link to download the JAIIB balance sheet notes is provided below.
What is the balance sheet equation in banking?
The balance sheet equation is a simple accounting formula that ensures a bank’s balance sheet always balances. It tells us that all resources of the bank (assets) are funded either through borrowings (liabilities) or the bank’s own funds (capital).
Basic Formula: Assets = Liabilities + Capital
- Assets are all things owned by the bank.
- Liabilities are all obligations the bank has to outsiders.
- Capital is the bank’s own money, including reserves and retained earnings.
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What are the main components of the balance sheet equation?
Understanding the components makes it easier to classify items and solve problems. In exams, it is essential to categorize all items correctly, as misclassification is one of the most common mistakes in computation questions. Typically, assets are provided as numerical values, while liabilities and capital often need to be calculated using the balance sheet equation.
| Component | Meaning | Examples in Banking Context |
| Assets | Things the bank owns | Cash, balances with RBI, loans & advances, investments |
| Liabilities | Things the bank owes | Customer deposits (savings/current/fixed), borrowings from other banks, bonds |
| Capital / Equity | Bank’s own funds | Share capital, reserves, retained earnings |
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How to compute the balance sheet equation?
To compute the balance sheet equation, follow these simple steps:
- List all assets: Include cash, advances, balances with RBI, and investments.
- List all liabilities: Include deposits, borrowings, and other obligations.
- Calculate capital: Use the formula:
Capital= Assets − Liabilities
- Check balance: Ensure that Assets = Liabilities + Capital.
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Example Question (JAIIB Style):
Q. A bank has the following data (₹ in crores):
- Cash: 50
- Balances with RBI: 100
- Advances: 300
- Investments: 200
- Deposits: 500
- Borrowings: 100
Solution:
- Total Assets = 50 + 100 + 300 + 200 = 650
- Total Liabilities = 500 + 100 = 600
- Capital = 650 – 600 = 50
- Check: 650 (Assets) = 600 (Liabilities) + 50 (Capital)
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FAQs
Assets = Liabilities + Capital.
It shows how a bank’s resources are funded.
Liabilities are what the bank owes, such as deposits and borrowings.
Capital is the bank’s own money, including share capital and reserves.
Misclassifying assets, liabilities, or capital items.
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