Banking 2: A bank’s income statement

Let's review the example I used in the previous video Which talks about being in a village and starting to set up a bank to reconcile between Savers of money and investment opportunities In fact, I wanted to go back to the example to underscore an important point On how the bank makes money And I think this example is very good As a tool to clarify the financial statement Because I do not think I have covered this topic sufficiently Where the previous one was the income statement And I hope to this extent that you have a good idea of ​​the balance sheet And now we will learn what the income statement is Let's say this is my balance sheet at the beginning First operational year.

Beginning of the first year And let's see if I can recreate it According to what I think I put up a capital Million dollars for the company Which is what came from my savings Or I went to ten of my friends and they gave me One hundred thousand dollars each However, it does not matter to us how the capital was collected and monitored All we care about is that we had a million dollars And then I bought a building so I could place The money in it is actually safe for the money People feel comfortable and safe when they are given their money And put it in that building Let's say we have a million dollars in real estate Then the villagers saw that big building Which I built and looks like a castle And they gave me at least part of Their savings are deposits I have in the building And they say, Wow, it's a safer place to put my money and my savings Better to put them in my bedding or bury them in your backyard And this private bank, "Sall", says he will give them Some benefits in return, and he appears to be a respectable person with a good reputation In our village So let's put some of our savings with him Then I'll get 10 million deposits in my bank Of course I told them, this is not a loan But it is almost a loan I do not borrow this money from you You guys can use this money anytime you need it So I have to put some of those deposits aside In case someone came the next day and said: I gave you Money yesterday And I need it today to pay a cleaning bill My teeth or something like that So I have to put some deposits aside for such an event And I thought to myself, then if I put 10% of that deposit This percentage may be the most that a person may come and claim his money during the day, unless There was an abnormal occurrence in the bank So I'll put 10% of the deposits aside and call them reserves So they are cash reserves Let's say it's a million dollars in cash And if you think that for any reason, it may happen More than one person comes at the same time to take his or her money A large percentage of people will come in the same period I will need a higher cash reserve In the end, I now have 9 million dollars People gave me 10 million and set aside a million of them And I have 9 million dollars left that I can loan This is productive capital When the most valuable capital, it is a claim that it is The services or goods of a person used Doing something can add value or produce more value Who used it So 9 million in loans I know I use those terms And I mean that because I think it's in our societies We have been busy giving names to money, such as dollars or points, for example And we forgot what that money represented Money or points represent claims On goods or services I met a lot of people who became fond of points Or, for example, like Khan, for example I get messages asking to get more points on the site In their account And they are fond of it It is represented by the last number But most importantly, what does the number system mean Actually for you In funds, this numerical system represents future claims on Services or goods So this is what my general balance looks like at first In the first year And I said I'll get 10% of these loans Let's say, for example, that I succeeded and none of the borrowers failed And I actually got my 10% And I decided to pay people – depositors – 5% of my profits.

So what will happen during this year? What is the value of the revenue that I will get from interest? I'll call that interest, interest income, so 9 million times 10%. I will get 900 thousand dollars Then, what are the interest costs? I think I should write this in green So, I have to pay 5% on the 10 million So it will be 500 thousand dollars I'll write it as a negative number so that it is It looks like an expense or costs Although it is a cost you can incur Thanks a positive number And this is a matter related to the way it is presented in the accounts I think the idea has arrived Let's put it as minus 500,000 dollars And to run the bank, I have this building It must be cleaned It must be maintained I have to hire a cashier and security guards And I have to buy security guards weapons These costs are greater than the benefits That you get here Let's say I have salaries And I have other costs Let's say minus 50 thousand dollars a year in salaries She should pay it to the employees And let's say for building maintenance and painting walls from time to time I have to leave the decorations from time to time Because the bank must appear luxurious in order to have confidence And it is in the form of a castle that cannot be penetrated So the continuation of this back also costs So I spent 50 thousand dollars on this topic So what is left with me? So let's see, 900 minus 500 equals 400 minus 100 more So I have 300 thousand dollars left But despite this primitive village in which I live Not so rudimentary that it pays no taxes So these numbers are before I pay taxes (Phone rings) My phone is ringing, but I'll ignore it In fact, it's hard to ignore it But generally, this situation is pre-tax And the mayor of the village tells me You have to pay for the army and the services you have We deliver it to you They take 30%.

It is an income tax Let's say they took a third So they will take 100 thousand dollars So what will be left for me? What is net income? 300 minus 100, I have 200,000 dollars left This is fair And for your information, this is the income statement And I'm going to talk a little bit about how each is worth These elements So let's draw a nice, big square around it Until it appears as a clear list of something So how will my budget come out at the end Year and taking into account the amount of money that I made So, suppose these loans are not being repaid People paid 10% of the interest So these loans will remain in the budget Let's draw these loans So I will still have assets of 9 million dollars, which are loans They didn't pay it And I still keep the building And in fact, since I spent 50,000 on room decorations and maintenance All the decorations and maintenance that were intended for the building to be beautiful and elegant The building is still worth $ 1 million So I still have a million dollars and 9 million dollars Of uncollected loans I have a million dollars in cash And now why do I have no cash? I've had a million dollars in cash before I assume that the level of deposits did not differ During the year So I have a million dollars in cash and nothing exciting Happened in the deposits During the year, I have it here I won 200 thousand dollars This is basically 200 thousand dollars You will be cash now So now I have 1.2 million dollars (one million two hundred thousand dollars) Deposits are unchanged I still have 10 million deposits These are the liabilities, because I owe them to people Those who deposit their money with me I owe them money So what do I have left? So what are my rights as an employer? My rights – My capital I invested is $ 1 million What are my rights now? So, rights are equal to total assets minus total liabilities? So what is my total assets now? 9 plus 1 equals 10 plus 1.2 I have 11.2 million total assets Calculate the sum of liabilities or what I owe i.e.

Minus 10 So I currently have 1.2 million in new capital Now something exciting has happened What is the change in my rights or my capital? I had a million dollars And now I have 1.2 million dollars So the change in my rights from one million to 1.2 million dollars Then we can call it if you are familiar with the mathematics curriculum "Delta" in mathematics means change This triangle means change The change in my rights – my capital is $ 200,000 This is the same as your net income So what is the income statement or the income statement? To start with, that's the income statement How can it be linked to the general budget? And later we will talk about the statement of criticism So, the general budget is a picture of your financial situation and what you have And what do you owe at any given time This is the budget at the beginning of the year. And this is the end-of-year budget This is a picture of what you have and your financial situation What do you owe in the beginning This is a picture of your financial situation, what you owe, and what you owe At the end of the year The income statement tells you what happened during the year It basically tells you how you got off this budget To this budget In another way the income statement at the end It will inform you of all your entries Mai money entered What are the funds that went out as expenses Or taxes, etc.

Thus, you get the total income in the form of a number And my complementary income is the change in capital So if you had income as a positive number in the year If that amount will exceed the budget in that year And if you have a negative income number It will decrease your budget for that year You can use the same term for net income On the change in rights And another thing you want to talk about is What is the return on rights? Your initial capital was $ 1 million How much money did you make? It grew by 200 thousand dollars So 200 thousand dollars to one million dollars We can say that this is a thousand thousand This equals 20%. This is the return on capital We put a million dollars and give us 20% plus it This is the return on our investment It equals (return on investment) And we note that the return on rights is, in fact The same The change in rights divided by the initial capital It is the same net income during that period But I call it start up capital Sometimes people talk about it like it's average Capital and so on Overall, I thought it was a good method at least An initial overview of the income statement and It shows you how they relate to each other This is the beauty of accounting science Since you have all those different financial statements That intertwine with each other You give me two budgets Then I can make an income statement And to clarify what happened between the two budget lines Generally, see you in the next video

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