Question

1. Explain why does the accounting identity Assets=Liabilities+Equity hold?

2. Explain what is the concept “reserve”, and is reserve an asset item or liability item for a commercial bank.

Answer 1

Answer to question 1.)

The accounting identity asset =liability+equity hold because:

1. The assets on the balance sheet consist of what a company owns or will receive in the future

and which are measurable.

2. Liabilities are what a company owes, such as taxes, payables, salaries, and debt.

3. The shareholders' equity section displays the company's retained earnings and the capital that has been contributed by shareholders. For the balance sheet to balance, total assets should equal the total of liabilities and shareholders' equity

The main reason for the accounting identity are the accounting principle of double entry. This accounting system records all transactions in at least two different accounts, and therefore also acts as a check to make sure the entries are consistent.

Answer to 2.)

Bank reserves are the cash minimums that must be kept on hand by financial institutions in order to meet central bank requirements. The bank cannot lend the money but must keep it in the vault, on-site or at the central bank, in order to meet any large and unexpected demand for withdrawals.

And reserve is an liability for the bank it is maintained from the deposit received .

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