Edmund Simon Lorenz.

Practical church music; a discussion of purposes, methods and plans online

. (page 26 of 27)
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in Form 65. This register is kept by days; that is, there
is a separate section for the work of each day. On the debit
side of this book is recorded the purchase ticket number, the
rate, the par value, a debit to Interest Earned But Not G>1-
lected account for the amount of interest paid the seller, and
a debit to the asset account affected for the cost of the prin-

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cipal of the bonds. There are two of these asset accounts cor-
responding to the classes into which the bank divides its hold-
ings: United States bonds, which term includes all issues of
the United States government; and bonds, securities, etc.,
which term includes all issues other than those of the United
States government. On the credit side is recorded the credit
involved in making settlement with the seller — Cashier's Check
accoimt or the account of a depositor. In addition to giving
a day book record of the purchases made this book also con-
stitutes a journal. At the dose of each day the totals of
the debit columns 'Interest Earned But Not Collected,"
''United States Bonds," "Bonds, Securities, etc.," and of the
credit columns, '^Cashier's Checks" and "Depositors' Ac-
counts," are transferred to the daily proof sheet whence they
are posted to the general bookkeepers' accounts.

Income from Bonds

Interest earned on bonds is paid by the debtor at regular
intervals, usually semiannually. As has already been indicated,
the bank keeps its profit and loss accotmts on a monthly basis;
hence it is necessary to account for the interest accrued each
month. Records to care for these accruals appear in the
bond ledger to be described later. In this book all bonds
of each issue held by the bank are entered in a separate ac-
count; e.g., all bonds of the United States Liberty First 3j^'s
issue held by the bank would be shown in the bond ledger
account maintained with this issue. As new securities are
bought or as sales are made the new balances resulting are
brought forward.

The accruals on each issue are cared for as follows: Dur-
ing the current month in a column of the ledger headed "Debit
Interest Earned But Not Collected" are entered debits to
the Interest Earned But Not Collected account for interest
paid to sellers on bonds of the issue purchased. In a column

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headed "Credit Interest Earned But Not Collected" are
entered credits to this account for interest collected from
purchases, as the bank sold bonds of this issue. On the last
day of the month, interest accrued on the issue is computed.
In making this computation the par value held on the last
day of the month is used as the base; the time is the time
elapsed since the last coupon or interest payment date for
the bonds ; and the rate is the coupon rate. The figure obtained
in this way is added to the total of the credit column showing
interest collected ; then the accrual figure from the preceding
month plus the interest paid on purchases is deducted. The
resulting figure represents the accrual on the particular issue
for the current month.

These figures for all issues held by the bank are credited
to the Interest account and debited to Interest Earned But
Not Collected on the bond department proof, whence the
entries are passed to the general books. The accrual figure
for each issue is entered in the debit "Interest Earned But
Not Collected" column for that particular issue in the bond
ledger. When, at the interest period for the issue, interest
is collected, credit for the amount is made to the Interest
Earned But Not Collected account. By this system the Bond
Interest account for each month carries to the Profit and
Loss account of the bank the actual earnings on hand. The
Interest Earned But Not Collected account is, of course, an
asset account which at the close of each month shows accurately
the amount due the bank on unpaid interest on bonds.

Collection of Bond Interest

A close watch on all interest periods is kept. Maturity
dates are shown by the bond ledger. Several weeks before
the interest falls due coupons from coupon bonds are clipped
and forwarded to the coupon collection department. The
coupon collection department effects collection and credits the

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Interest Earned But Not Collected account of the bond depart-
ment. Thus as the interest is collected upon any given block
of securities the account of Interest Earned But Not Q)llected
is wiped out and there remains but the Interest account as a
record of the earnings of the department

In the matter of collecting interest on registered bonds
the book entries are the same but the procedure in collecting
is somewhat different. When the bank receives bonds of
this class it has the seller execute an assignment in favor of
itself or its nominee, the head of the bond department The
bonds are then transferred on the books of the issuing con-
cern. At interest periods the issuing concern forwards a
check to die bank. Checks received for this purpose are
credited to the Interest Earned But Not Collected account
through the bond department direct

Pledging of Bonds

As has been previously observed, an appreciable amount
of the bonds held by the bank is from time to time pledged
to secure various state and United States government deposits,
to secure the bank's circulation, to secure trust funds, etc.
The bank also pledges bonds as security to foreign banks who
accept for its account.

Various methods are employed in holding pledged bonds.
In many cases they are lodged with the federal reserve bank.
They may, however, be held in the bank itself, in which case
they are pledged to a nominee named by the federal reserve
bank. In case the bonds are pledged to secure acceptances of
foreign banks the securities are turned over to the customers'
securities department, which holds them as nominee. In what-
ever manner the pledged securities may be held, however,
they pass out of the possession of the bond department; even
though they are held in the bank they are lodged in a separate
section of the vault entirely outside of the jurisdiction of the

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department. While they remain the property of the bank they
are subject to a contingent lien in that they may be appropriated
in case the undertaking secured by the pledge is not carried

To care for the accounting aspects of pledging, asset
accoimts designating the nature of the pledges are set up.
Thus there are such accoimts as United States Bonds to Secure
United States Deposits, United States Bonds to Secure State
and Other Deposits, etc. When a block of bonds is pledged,
entries are made charging the proper pledged asset accoimt
and crediting the asset account from which the pledged securi-
ties were taken. Thus if United States bonds were pledged
to secure circulation, the entry would consist of a charge
to United States Bonds to Secure Circulation account, and
a credit to United States Bonds account. Upon the termina-
tion of the banking relation necessitating the pledging of any
block of bonds, the bonds are again turned back to the bond
department and the entry is reversed.

In the matter of interest on pledged securities, the nominee
of the institution holding the securities acts as the agent of
the bank in collecting the interest when due. When col-
lections have been made the interest received is forwarded
to the bond department where it is handled in the usual

Borrowing and Lending Bonds

A practice sometimes met with is that of borrowing and
loaning bonds. The effect of the monopoly granted to certain
issues of United States government bonds especially to serve
as collateral for securing circulation, public deposits, etc., has
been to give these bonds abnormally high value on the market
— a value so high indeed that there has been no profit in
owning them. Under these circumstances a bank disposes
of much of its own holdings of government securities at the

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favorable market rate. To provide for its needs it arranges
with an owner of bonds of the required issue to loan it the
amount needed. The borrower holds the bonds under a trust
receipt. For the accommodation it pays the owner a moderate
rate of commission. While holding the bonds the bank col-
lects the interest for the customer and this income together
with the rate of commission which the bank pays him con-
stitutes an attractive yield on the bonds. These borrowed
securities are pledged for the purposes and in the manner
previously described. To record its liability to the owner,
the bank maintains an account termed "bonds borrowed" which
is credited when bonds are borrowed and debited when they
are returned.

Likewise when a bank has a surplus of bonds on hand
above its own requirements, it loans them to other banks.
In loaning bonds the securities are charged to an account
termed "Bonds Loaned," and turned over to the borrower
on proper trust receipt. When the securities are returned
to the bank the Bonds Loaned account is credited. The prac-
tice of borrowing and loaning bonds, however, has been largely
discontinued in recent years due to decreased needs on the
part of national banks for the high-priced government issues,
and it no longer forms an important part of the work of the
bond department.

Sale of Bonds

It must not be assumed that all issues of securities are
purchased by the bank and held by it until maturity. The
bank may sell at any time to take advantage of an appreciation
in the market or to obtain additional funds with which to carry
on its operations. In this same category are sales of original
issues of United States government securities to customers,
inasmuch as the bank treats this transaction as a purchase
made from the government and a sale made to its client.

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Upon receipt of an order from an officer to sell bonds
a sales ticket is prepared for the purchaser. This ticket is
similar in form and composition to the purchase ticket already
mentioned. In case funds are received to pay for the bonds
before they are ready for delivery, the department prepares
a due bill stating that the customer has paid for a certain
amount of a series of securities of a certain issue. This bill
is signed by an officer of the bank and forwarded to the
customer, who holds it as a receipt pending delivery of the
securities. When ready for delivery the bonds are coimted
out and finally delivered according to the agreement made
with the purchaser. In the sale of securities listed on the
exchange the rules of good delivery are, of course, strictly
adhered to,

"Bonds Sold" Register

At the time of the sale of any security entry is made from
the sales ticket to the sold register. This register performs
the same fimction in regard to sales that the bought register
does with reference to purchases and is the same in form as
Form 65, though slightly different in its ruling. On the debit
side of this book are entered the sales ticket number, the rate,
and the par value. Checks and other cash items received are
sent to the note teller to be sorted and routed for collection;
hence the sold register has a column to record such a charge
for the amount received from each sale. If any loss has been
sustained from selling the bond for less than its book value
the amount of this loss is entered as a debit to the Bond
Department Profit and Loss account. On the credit side of
the register appear credits to the asset accoimts reduced by the
sales. Unless, as is rarely the case, the bond is sold on its
interest date, the purchaser pays the bank for the amount
of interest accrued on the security since the last interest date.
This amount is credited to the Interest Earned But Not Col-

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lected account just as any other amount representing interest
collected would be. Any profit realized from the sale due
to the rise of the market value of the securities is here credited
to the Bond Department Profit and Loss account. At the
close of the day the totals of the journal columns of this
book are transferred to the departmental proof whence they
are posted to the general accoimts of the bank.

Valuation of Bonds

In the study of the bond department the question of adjust-
ing values of bonds and the profit or loss resulting from their
appreciation or depreciation in value while in the possession
of the bank has been mentioned. Bonds, like stocks, are sub-
ject to considerable fluctuations in price, in accordance with
fluctuations in the general level of interest rates and changes
in the trend of the earning power and strength of the issuing

When a security is purchased by the bank both the par
value and the market rate at which it was purchased, or the
'*book value," as it is termed, are entered on the records.
The par value, however, is used only in checking and describ-
ing the issues, and figuring interest; it never appears as a
figure affecting the assets of the bank. Charges and credits
to the bond accounts are made only at the book value of the
security. The intention is to have the book value agree
approximately with the current market value. The term "ap-
proximately" is used because in practice it is not worth while,
or even possible, to change the book value of bonds to agree
with each change in market price. At intervals the
inventory of bonds held is gone over and the book values
written up or down to correspond to the current market price.
The amount of profit or loss occasioned by this operation is
debited or credited to the Bond Department Profits accoimt, as
the case may require.

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BONDS ^363

Records of the Department

In keeping with the negotiable nature of securities, the
department maintains, in addition to the bought and sold
registers already described, certain auxiliary records covering
every detail of the transaction to which the bank is a party.
These records also serve as a valuable source of information
for answering inquiries received from the bank's customers
regarding securities over which some controversy may have
arisen. The principal auxiliary records are:

1. The bond number book

2. The bond ledger

3. The security cards

Number Book. The bond number book contains a record
of the purchases, sales, and holdings of each issue by bond
numbers. It is divided into two sections — ^the bought, and
the sold. When the bonds are received, the date, the number
of the purchase ticket upon which the transaction is recorded,
the denomination of the bond and the individual number
of each bond received, are recorded. As this is done a stamp
is placed on the purchase ticket stating that the numbers of
the securities described thereon have been recorded in the
number book. When the bonds are sold the numbers are
entered on the sold side of the number book, denoting that
they have passed out of the bank's possession. This book
is of great assistance in tracing bonds through the department,
in detecting lost, stolen, or counterfeit bonds, etc.

Bond Ledger. Another record of importance is the bond
ledger. In this ledger a complete record of the bonds is
maintained from the time of their purchase until their final
disposition. For convenience there are two volumes, one for
United States bonds held by the bank, and one for all other
securities. A separate page is devoted to each issue held
by the bank and a complete description of the issue, the rate,

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when due, and interest periods, is noted at the top of the
page. Each entry in the ledger shows the name of the com-
pany or individual from whom the bonds were purchased
or to whom they were sold. On the debit side information
relating mainly to the purchase of the security appears. This
is taken from the bought register and contains the following
information: the date, the ticket number, the price, the par
value, and the book value. In addition, the debit side of the
ledger shows the amoimt charged to Bond Department Profit,
if any, for loss due to selling the bonds at less than book
value. To the credit side of the ledger is posted the data
regarding sales as taken from the sales register. This con-
tains the par value, the book value, and the bond department
profit, if any, occasioned by selling at more than book value.
The difference between the book value of debits and credits
in the ledger at any given time is the total value of the
securities being held by the bank. Should an issue of bonds
which the bank holds fall due, be called for payment, or be
sold in its entirety, the ledger sheets carrying the record of
the issue are taken from the ledger and filed in the department
for future reference should any question concerning them

In the ledger important data concerning the interest on
the securities is shown. The date at which interest is due
is recorded and also the amount due. This ledger space is
consequently used as an interest tickler, dates on which interest
payments are due on bonds held by the department being taken
from it by the clerks in charge of this phase of the work.
When the interest is paid the date on which payment was
received is entered in the proper space provided for that
information. The ledger also contains details of the Interest
Earned But Not Collected account, as has been already in-

Security Cards. For ready reference concerning any

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security held, and to check the accuracy of the ledger, a card
file is maintained. There is one security card, as these cards
are called, for each issue held by the bank. On each card
appears the name of the issue, the maturity date, and the
interest dates. The card is divided into two parts — one part
for purchases, and one part for sales. When securities are
purchased entries showing the name of the party from whom
the purchase was made, the date, the par value, and the book
value, are made in the purchase section of the proper card.
When a sale is made, the date, the name of the person to
whom sold, the par value, the price at which sold, and the
balance held by the bank, are recorded. These security cards
are an important departmental record, since they furnish a
quick and accurate source of information on matters per-
taining to a given security.

Supplementary Statements and Reports

Two statements which greatly facilitate the official work
in the supervision of the bond department and the general
policy employed in regard to it are the statement of bond
maturities and the statement of daily transactions. These
supplementary records are prepared for the use of the bank's
officials. It is important that the management of the bank
know not only the true financial position of the institution
as of a given day, but also that they look into the future
in so far as it is possible. The maturity of a bond issue
of which the bank is a large holder and the prospect of having
the resulting idle funds to reinvest is a particularly important
consideration for formulating the investment policy of the
institution. To furnish information regarding maturities, a
statement of bond maturities is prepared. This statement
gives a record of the bonds falling due in less than one year,
in from one to two years, two to three years, three to five
years, five to ten years, and all over ten years. Another

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important report is the statement of transactions for the day.
This statement, which is sent to the cashier and the executive
managers, shows the bonds on hand at the close of the busi-
ness, their disposition if pledged, and a resum6 of every transac-
tion made during the day.

Bond Department Proof

A proof of the day's operations (Form 66) is prepared
and forwarded to the general bookkeepers' department as a
basis for the entries which this department makes to the
control accounts of the bank. The basis for these entries, as has
been previously observed, are the bought and sold registers and
the earnings book. A summary of the characteristic entries

1. Bonds, securities, etc. — ^this asset account, which repre-
sents the amoimt of securities other than United States bonds
held by the bank, is debited for all securities purchased and
borrowed and for the amount of securities which are returned
to the bond department by pledgees. It is credited for all
securities sold, pledged, or loaned.

2. U. S. Bonds on Hand — ^this account, which is similar
to the former but includes only United States securities,
is debited and credited exactly as is the Bonds, Securities,
etc., accoimt when United States bonds are purchased, bor-
rowed, loaned, sold, or pledged.

3. U. S. Bonds to Secure U. S. Deposits; U. S. Bonds
to Secure Bills Payable with the Federal Reserve Bank ; U. S.
Bonds to Secure War Savings Stamps and Thrift Stamps;
U. S. Bonds to Secure Acceptances of Foreign Banks;
U. S. Bonds to Secure State and Other Deposits ; and U. S.
Bonds to Secure Circulation; U. S. Bonds to Secure Trust
Department Funds — ^these accoimts are charged when United
States bonds are pledged for any of the purposes implied in
the titles and credited when the bonds are released and returned
to the bank.

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4. Other Bonds to Secure Acceptances of Foreign Banks;
Other Bonds to Secure U. S. Deposits; Other Bonds to Secure
State and Other Deposits ; Other Bonds to Secure Trust De-
partment Funds — ^these accounts, which are the counterparts
of those mentioned in the preceding paragraph except that
they cover bonds other than those of the United States gov-
ernment, are debited when bonds other than United States
securities are pledged for the purposes implied in the titles
of these various accoimts, and they are credited when the
bonds are released by the pledgees and returned to the depart-

5. U. S, Bonds Loaned — ^this account representing bonds
loaned to customers is charged when United States bonds are
loaned by the bank and is credited when they are returned.

6. Other Bonds Loaned — ^this account is debited when
bonds other than United States securities are loaned and
credited when the bonds are returned.

7. Proceeds U. S. War Savings Certificates, Stamps, and
Thrift Stamps — ^this accoimt, which represents the bank's
liability to the government for sales of these issues made to
customers, is credited for the amount of sales of these stamps
and certificates when sold to the public and it is debited once
each month for the entire amoimt, at which time a check is
issued to the government for the amount due.

8. U. S. Bonds Borrowed, and Other Bonds Borrowed —
these accounts are credited when the bonds are received and
debited when they are returned to their owners..

9. Interest Earned But Not Collected — ^this accoimt is
charged as interest is earned on the bonds held by the depart-
ment and when payment is made to sellers for accrued interest ;
it is credited when interest earned is paid and when purchasers
pay the bank accrued interest

10. Interest — ^this accoimt is credited for interest earnings
on securities each month. It is further divided into sections.

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Form 66. Bond DepartmenVe

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Bond Deft. Pboop




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Daily Proof. (Size 13H x I7-)

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"Interest — Normal Tax Exempt" and "Interest — Income Ex-
empt," to facilitate making the bank's income tax return to
the government.

II. Bond Department — Profits — ^this account is charged
for all losses sustained by the bank due to selling bonds below
the book value, and is credited for all profits made by the
bank due to selling above the book value.

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Online LibraryEdmund Simon LorenzPractical church music; a discussion of purposes, methods and plans → online text (page 26 of 27)