Chapter 05

Accounting for Loans

Lecture 07
Dr/Mostafa I. EL-Feky
 Accounting treatment for loans
Allowance For Loan Losses:

Assume that the balance in the allowance for loan losses account is L.E.
300,000; before adjustments at the end of December 2022.
Additional information:
1) L.E. 16,000. loans declared uncollectible and should be written off
(commercial loans).
2) L.E. 13,000. received as a recovery of a prior year's write off of loans
(commercial loans).
3) Allowance for loan losses must be increased by L.E. 35,000.

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 Accounting treatment for loans
Dec. 31, Allowance for loan losses 16,000
2022 Commercial Loan 16,000

Commercial Loan 13,000

Dec. 31, Allowance for loan losses 13,000
2022 Cash 13,000
Commercial Loan 13,000

Dec. 31, Provision for loan losses 35,000

2022 Allowance for loan losses 35,000

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 Accounting treatment for loans
Uncollectible Interest Receivable:
When a loan is deemed uncollectible and written off, any uncollectible interest
receivable applicable to the uncollectible loan should also be written off. However,
the write off of interest of uncollectible interest receivable is made against Interest
Income. That means we reverse the entry that we recorded before.
Assume that a loan balance of L.E. 25,000 of a customer is deemed uncollectible
and must be written off. Assume also that the unpaid balance of interest receivable
on the loan is L.E. 2,700.
Allowance for loan losses 25,000
Commercial loans 25,000
Interest income – Commercial loan 2,700
Interest Receivable 2,700
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 Accounting treatment for loans
Assume that HSBC Bank had an allowance for loan losses at January 1, 2022, L.E. 3,400,000.
During 2022, the bank recovers loans previously charged off, L.E. 220,000. At the end of 2022,
the bank decided to declare L.E. 280,000 in current loans as uncollectible and worthless this year.
The calculated amount of provision for loan losses for the year is L.E. 380,000.
Calculate the balance of allowance for loan losses at the end of 2022.

Balance of allowance for loan losses, Jan. 1, 2022 L.E. 3,400,000

Add: Recoveries on loans previously charged off 220,000
Add: Current provision for loan losses 380,000
Deduct: Loans declared uncollectible during the year 280,000
Allowance for loan losses balance, at the end of 2022 3,720,000

Dr/Mostafa I. EL-Feky 5
 Chapter 06
Accounting for Deposits

Dr/Mostafa I. EL-Feky
 Accounting treatment for Deposits
Types of deposits:
(1) Demand deposits (DDA):
▪ These deposits may be withdrawn on demand, i.e. without prior notice to the bank.
▪ The most common type of demand deposit is the regular checking account, and the most
common type of withdrawal instrument is the check.
(2) Saving deposits:
▪ These deposits allow depositors to save money over a period of time.
▪ Saving accounts have no maturity date, whereas time deposits do.
▪ The customer is allowed to add to or withdraw from his saving account w ithout any
restrictions.
▪ NOW accounts (negotiable order of withdrawal).
▪ Money Market Deposit Accounts (MMDAs)

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 Accounting treatment for Deposits
(3) Time deposits:
▪ These deposits have a specific maturity date.
▪ The customer must wait until the maturity date or pay a penalty for early withdrawal.
▪ Time deposits typically pay interest and the rate of interest usually varies with the term of the
deposit.
1- A customer deposits L.E. 7,000 currency and a check for L.E. 3,000, drawn on another bank, to
his saving account.
Currency and coin 7,000
Due from banks 3,000
Saving deposit accounts 10,000

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 Accounting treatment for Deposits
2- A customer buys a L.E. 20,000 certificate of deposit and pays for it as follows:
a- L.E. 8,000, transfer from his saving account. b- L.E. 12,000 deposited in currency.
Saving deposit accounts 8,000
Currency and coin 12,000
Certificate of deposits 20,000
3- A customer transfers L.E. 4,000 from his checking account to his saving account.
Demand deposit accounts 4,000
Saving deposit accounts 4,000
4- A customer buys a L.E. 3,500 cahier's check and pays for it as follows: L.E. 2,000 in currency.
L.E. 1,500 with a check drawn on the bank.
Currency and coin 2,000
Demand deposit accounts 1,500
Cashier's checks 3,500
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 Accounting treatment for Deposits
5- A customer cashes the following checks: L.E. 3,800, check drawn on another bank, at a teller
window. L.E. 2,400, check drawn on the bank (on us).
Due from banks 3,800
Demand deposit accounts 2,400
Currency and coin 6,200
6- A customer requested the bank to wire transfer L.E. 11,000 to another bank and withdraw the
money from his saving account.
Saving deposit accounts 11,000
Due from Banks 11,000
7- A customer redeemed a government saving bond for L.E. 1,000. The amount was credited to
the customer’s NOW account.
Redeemed government saving bonds 1,000
NOW accounts 1,000
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 Accounting treatment for Deposits
8- Today's in-clearing received from the Central Bank of Egypt are as follows:
Customers' demand deposit accounts L.E. 300,000
Customers' NOW accounts 200,000
Cashier's checks 150,000
Total in-clearing L.E. 650,000
Demand deposit accounts 300,000
NOW accounts 200,000
Cashier's checks 150,000
Due from banks 650,000
9- Interest of L.E. 1,600 on a certificate of deposit (CD).

Interest expense 1,600

Interest Payable 1,600 Interest Payable 1,600
Demand deposit 1,600

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 Accounting treatment for Deposits
10- A customer has a certificate of deposit for L.E. 100,000 matures today. The customer
requested the bank to distribute the proceeds from the certificate as follows:
Deposit to checking account L.E. 10,000
Purchase cashier's check 27,000
Buy a new certificate of deposit 60,000
Receive cash from the teller 3,000
Total proceeds 100,000

Certificate of deposit (Old) 100,000

Demand deposit accounts 10,000
Cashier's checks 27,000
Certificate of deposit (New) 60,000
Currency and coins 3,000

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 End of
Lecture 07
Dr/Mostafa I. EL-Feky