Suppose accountants at Mid-Size National Bank (Table 1)...

Suppose accountants at Mid-Size National Bank (Table 1) discover that they've made an error: Cash in vault is only $$\$ 8$$ million, not $$\$ 10$$ million. a. Which other entries in the bank's balance sheet will change as a consequence of discovering this error? b. If the required reserve ratio is 0.10 , does this bank now have excess reserves or deficient reserves? Of what value?

Suppose accountants at Mid-Size National Bank (Table 1) discover that they've made an error: Cash in vault is only $$\$ 8$$ million, not $$\$ 10$$ million.
a. Which other entries in the bank's balance sheet will change as a consequence of discovering this error?
b. If the required reserve ratio is 0.10 , does this bank now have excess reserves or deficient reserves? Of what value?

Key Concepts

Excess versus Deficient Reserves

Excess reserves occur when a bank holds more reserves than the regulatory minimum, while deficient reserves occur when it holds less than the required amount. A misstatement in the cash balance, such as an overstatement of vault cash, affects the bank’s reserve position relative to the required level. If the error reduces the bank’s actual cash below the regulatory minimum calculated from deposits, the bank will have deficient reserves by that shortfall amount.

Balance Sheet Adjustments

A balance sheet is a financial statement that reports a bank’s assets, liabilities, and equity. When an error is discovered — such as an overstatement of cash — adjustments must be made to correct asset values. Since assets must equal the sum of liabilities and equity, any decrease in an asset requires an equal reduction elsewhere, usually in the bank’s equity or retained earnings, ensuring that the accounting equation remains balanced.

Accounting Equation

The fundamental accounting equation, Assets = Liabilities + Equity, governs the preparation of balance sheets. If one asset account (for example, cash) is misstated, correcting it necessitates an adjustment on the liabilities or equity side so that both sides of the equation remain equal. This concept is central to understanding the impact of any error in financial statements.

Reserve Requirement

The reserve requirement is a regulatory mandate that stipulates the fraction of deposit liabilities a bank must hold in reserve, either in its vault or on deposit with the central bank. This requirement is expressed as a ratio, and it ensures that banks have enough funds to meet withdrawals, influencing how much cash or reserves a bank must maintain relative to its deposits.

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