Transferring The Profits

One of the operations about which correspondence with head office is necessary is that of transferring the profits. This is done at the end of every quarter, or at the end of the half-year. All through the term the amounts of profits and expenses are accumulating in the general ledger accounts devoted to them; at the end, these accounts are cleaned up and the net result transferred to head office.

It has already been shown how, when each bill is discounted, the bank appropriates from the gross amount a sum representing the interest to the date of maturity. These appropriations are credited to interest or discount received. The balance of the account at the end of the term will show the gross amount received. But although these profits are collected or appropriated, it may be that some part of them is not yet actually earned, because the bills to which they pertain have not yet matured.

Allowing For Rebate

If the bank discounts on 1st October a bill for $1,000 due 1st December, appropriating on the day of discount, say, $10 for interest, and if the quarter or the half-year ended on 31st October, so far as this special transaction is concerned, it will have actually earned on 31st October only half the amount appropriated by it, since half of the term of the bill is yet to run. Therefore, although it may be that the bank will not be called on to relinquish, in the form of rebates, any of the profits pertaining to the unexpired terms of bills, it is necessary, before the net results for any term can be arrived at, to calculate the rebate on all bills not yet due, at a fixed rate per cent. To do this it is not necessary to take each bill by itself. The totals shown by the discount diary afford the means for a much shorter calculation.

The Calculation

For example, if the diary shows $5,720 due 1st November, and $6,834 due 2nd November; and if the fixed rate is 6 per cent., the end of the quarter, 31st October, then interest at that rate would be figured for one day on $5,720, for two days on $6,834, for three days on the total due 3rd November, and so on till all the bills had been covered. These interest calculations, on being added together, would represent the amount of rebate at 6 per cent. on unexpired paper, or the amount of profits appropriated by the bank but not yet earned. If this process is not followed, if the bank publishes as profits all the funds appropriated by it as interest and discount, without deducting the rebate, it would be showing as profits of one year some that belonged to the next.

There will have been, at the end of the preceding quarter or half-year, an amount reserved for rebate representing what was then required to make rebate at 6 per cent., or at whatever rate is fixed, for all unmatured paper under discount. By way of example, we may suppose this amount to be $4,726.13. It will be standing in the general ledger at credit of rebate of discounts. All that has to be done on this succeeding occasion is to readjust that balance. Suppose the calculations of interest on the diary totals, referred to above, when added together, amount to $4,965.23. That will be the amount required to make rebate on unmatured paper on the present occasion. As there is already reserved for that purpose $4,726.13, it is only necessary to debit discount account with $239.10 to bring the rebate reserve up to its proper figure. It sometimes happens that the total amount required is less than that already reserved. Then the rebate reserve is reduced, the difference being credited or added to the profits of the term just ending.

The total amount shown at credit of commission and exchange may be taken into profits, as it is practically all earned. These amounts are debited, or taken out of the accounts, and credited to profit and loss account.