A balance sheet consists of various assets on one side and liabilities and owners' equity on the other side. Liabilities and owners' equity are also referred to as claims against an entity's assets. Unlike a typical balance sheet that usually has inventory, accounts receivable and fixed assets listed on the asset side, a commercial bank's balance sheet often has loans and investments as major assets. Major claims of a commercial bank's balance sheet are deposits and borrowings, rather than typical claims, such as accounts payable, which is a main liability account for non-bank entities.
Loans are a major asset category on a commercial bank's balance sheet, since by definition, a bank is in the business of lending money and its primary money use is to issue loans to businesses and consumers. While a commercial business can have uncollectible accounts receivable, a bank may have bad loans at times. To preserve a bank's asset value, it must ensure the quality of its loans. Similar to writing down any impaired assets, writing off bad loans results in losses and reduces owners' equity.
As a financial institution itself, a commercial bank also invests in various financial securities to complement its loan portfolios. A right mix of investments helps control total asset risks and provide liquidity to meet any coming-due liabilities. A bank spends relatively less money on physical assets, and investments are another major asset category on a bank's balance sheet. A bank may invest in some securities for speculative trading purposes, some as held-to-maturity investments to earn higher yields, and others as available-for-sale holdings to provide needed liquidity.
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A commercial bank has the unique advantage of accessing to customer deposits as a major money source. Both businesses and individuals place their funds with banks on a continuing basis. Customer deposits are either time deposit bearing interest or on-demand deposit bearing no interest, which has different implications on claims. With time deposits, or savings accounts, a bank can more easily manage the liquidity of the future claims but at certain costs. With on-demand deposits, or checking accounts, a bank obtains free funding but must maintain a certain level of asset liquidity.
Borrowings constitute another major claims on a bank's balance sheet. A commercial bank lends but also borrows. A bank may issue short-term bank notes and long-term bank bonds, as well as bank certificates of deposit, to raise money. Using borrowing, a bank can have more control over planning a fund-raising effort for specific investments and operations, compared to relying on deposits. However, borrowings increase financial risks if earnings fail to grow and must be maintained within a certain limit against the level of a banks' own equity.