Bank and Insurance Company Accounting: Basic concepts for the general accountant
Bank and Insurance Accounting: Core Concepts for the General Accountant
Bank accounting differs from any other field because the “Inventory” here is cash, and the “Cost of Goods” is the interest paid on deposits. For a general accountant, entering the banking or insurance world requires a shift in mindset: from physical inventory to NIM (Net Interest Margin), ECL (Expected Credit Loss), and Off-Balance Sheet commitments—Digital Salla.
- Core differences between bank and commercial accounting.
- How to calculate NIM and operational efficiency indicators.
- Accounting treatment for Deposits, Loans, and Letters of Credit.
- A quick look at IFRS 9 and credit loss provisions.
- Basics of Insurance Accounting: Premiums, Claims, and Technical Reserves.
- Interactive Tool: Calculator for key bank performance indicators.
1) What is Bank Accounting? (The Shift in Logic)
While a merchant buys items to sell for a profit, a bank “buys” deposits from the public (paying interest) and “sells” them as loans (receiving higher interest). Bank accounting focuses on managing this Net Interest Margin (NIM) while maintaining Liquidity to meet withdrawal demands.
| Feature | Commercial Company | Bank / Financial Institution |
|---|---|---|
| Primary Inventory | Goods / Raw Materials | Cash / Money |
| Main Revenue | Sales of Goods/Services | Interest Margin + Commissions |
| Customer Deposits | Prepayment (Liability) | Core Source of Funds (Liability) |
| Loans Given | Short-term receivable | Main Asset (Income Generating) |
2) The Flow of Interest Margin (SVG)
This diagram explains the simple journey of money: from source (Liability) to use (Asset) and the resulting profit.
3) Core Banking Operations and Accounting Treatment
3.1 Deposits (Liabilities)
When a customer deposits money, the bank records a Liability.
- Current Accounts: Immediate liquidity, usually zero or low interest.
- Term Deposits: Fixed period, higher interest, lower liquidity.
3.2 Loans and Advances (Assets)
Loans are the bank’s main income-generating Asset. The accounting challenges here are:
Daily Financial KPIs Tracker - Excel File
- Interest Accrual: Monthly recognition of earned interest even before the payment date.
- Amortized Cost: Measuring the loan value net of fees and adjusted for effective interest.
4) IFRS 9: Expected Credit Loss (ECL)
The IFRS 9 standard changed how banks account for risk. Banks no longer wait for a loan to “fail” (Incurred Loss); they must estimate losses from Day 1 based on three stages:
- Stage 1 (Performing): 12-month ECL recognized.
- Stage 2 (Under-performing): Significant increase in credit risk; Lifetime ECL recognized.
- Stage 3 (Non-performing): Actual default or high probability; Lifetime ECL + Interest calculated on net balance.
5) Off-Balance Sheet Commitments (LC & LG)
Banks provide guarantees that aren’t “debt” yet but might become one. These are tracked in Off-Balance Sheet accounts:
- Letters of Credit (LC): Guaranteeing payment to an exporter upon shipping goods.
- Letters of Guarantee (LG): Guaranteeing a contractor’s performance to a client.
6) Basics of Insurance Accounting: A Different World
In insurance accounting, the “sale” happens today, but the “cost” (claims) might happen years later.
- Gross Written Premiums (GWP): The total “revenue” recorded for issued policies.
- Unearned Premium Reserve (UPR): Deferring premium income to match the risk period.
- Incurred But Not Reported (IBNR): Estimating claims that have happened but haven’t been filed yet.
7) Interactive Tool: Key Bank Performance Calculator
Enter the data below to calculate essential bank efficiency and risk ratios.
Calculations update automatically based on your entries.
8) Key Bank Performance Ratios (Explanation)
| Indicator | Formula | Significance |
|---|---|---|
| NIM | (Int. Income – Int. Exp) / Avg Assets | Core profitability of lending activities. |
| CTI | Op. Expenses / Op. Income | Operational efficiency (Lower is better). |
| NPL Ratio | Non-Performing Loans / Gross Loans | Asset quality and credit risk level. |
| Coverage | Provisions / NPLs | Ability of the bank to absorb loan losses. |
9) Daily Controls and Reconciliations in Banking
Internal Control Points
- Cash Reconciliations: Matching ATM and branch vault physical cash with system balances daily.
- Interbank Matching: Reconciling accounts with the Central Bank (SAMA/CBE) and correspondent banks.
- Suspense Accounts: Immediate clearing of unallocated transactions to prevent fraud.
- Interest Sweep: Verifying that system-calculated interest matches policy rates.
10) Frequently Asked Questions
Is customer money in the bank an Asset or a Liability?
For the bank, it is a Liability (Money they owe to the customer).
What is NIM in banking?
Net Interest Margin—it measures the profitability of the bank’s core lending and investment business.
Why is IFRS 9 difficult for accountants?
Because it requires complex statistical modeling of future risks rather than just recording historical events.
11) Conclusion
Transitioning to bank and insurance accounting requires mastering the “Interest” logic, regulatory compliance, and risk provisioning. By focusing on NIM, operational efficiency (CTI), and disciplined daily reconciliations, you ensure that the financial institution remains liquid and profitable.