+-------------------------------------------------------+--------------+
|                                                       | **Page No.** |
+-------------------------------------------------------+--------------+
| **MEMBERS' SHARES**                                   | **2**        |
+-------------------------------------------------------+--------------+
| > ***DEMAND DEPOSITS***                               | > **3**      |
+-------------------------------------------------------+--------------+
| > **Share Draft Accounts**                            | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Share Draft Accounts***     | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **3**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **4**      |
+-------------------------------------------------------+--------------+
| > ***SAVINGS DEPOSITS***                              | > **4**      |
+-------------------------------------------------------+--------------+
| > **Regular Share Accounts**                          | > **4**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **4**      |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **4**      |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **4**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Member's Passbook***                  | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Share Accounts***           | > **5**      |
+-------------------------------------------------------+--------------+
| > **Money Market Shares**                             | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **5**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Money Market Share***       | > **6**      |
| >                                                     |              |
| > ***Accounts***                                      |              |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **6**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **6**      |
+-------------------------------------------------------+--------------+
| > **Other Share Accounts**                            | > **6**      |
+-------------------------------------------------------+--------------+
| > **Escrow Accounts**                                 | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Escrow Accounts***          | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **7**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **8**      |
+-------------------------------------------------------+--------------+
| > **Unposted Payroll Deductions Shares**              | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **8**      |
+-------------------------------------------------------+--------------+
| > **Public Unit Shares**                              | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > **8**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Public Unit Share           | > **9**      |
| > Accounts***                                         |              |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **9**      |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **9**      |
+-------------------------------------------------------+--------------+
| > **Shares of Nonmembers**                            | > **9**      |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **9**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **9**      |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > **9**      |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Nonmember Share Accounts*** | > **10**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **10**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **10**     |
+-------------------------------------------------------+--------------+
| > ***TIME DEPOSITS***                                 | > ***10***   |
+-------------------------------------------------------+--------------+
| > **IRA/Keogh Retirement Accounts**                   | > ***10***   |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **10**     |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > **11**     |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > **11**     |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual IRA/Keogh Retirement***     | > **11**     |
| >                                                     |              |
| > ***Accounts***                                      |              |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **11**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **11**     |
+-------------------------------------------------------+--------------+
| > **Share Certificates of Deposit**                   | > ***11***   |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > ***11***   |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > ***11***   |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > ***11***   |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Share Certificate           | > ***12***   |
| > Accounts***                                         |              |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > ***12***   |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > ***12***   |
+-------------------------------------------------------+--------------+
| > **Club Accounts**                                   | > **12**     |
+-------------------------------------------------------+--------------+
| > ***Posting Payments and Withdrawals to***           | > **13**     |
| >                                                     |              |
| > ***Club Accounts***                                 |              |
+-------------------------------------------------------+--------------+
| > **Brokered Deposits**                               | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Posting to Members' Accounts***                  | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Posting to Individual Share and Loan Ledger***   | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Balancing Individual Brokered Deposits***        | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > ***13***   |
+-------------------------------------------------------+--------------+
| > ***DEFINITIONS***                                   | > ***14***   |
+-------------------------------------------------------+--------------+
| > ***PROCESSING BASIC SHARE TRANSACTIONS***           | > ***14***   |
+-------------------------------------------------------+--------------+
| > **When Payments on Shares are Received**            | > ***14***   |
+-------------------------------------------------------+--------------+
| > **When Shares are Withdrawn**                       | > ***15***   |
+-------------------------------------------------------+--------------+

**MEMBERS' SHARES**

Federal credit unions are empowered to issue share accounts at varying
dividend rates and share certificates at varying dividend rates and
maturities, subject to rates, terms, and conditions as established by a
credit union\'s board of directors. Section 701.35 of the National
Credit Union Administration Rules and Regulations provides flexibility
to allow each federal credit union to develop a system of share accounts
and share certificate accounts of its members.

The following are the account titles which can be used for the various
types of share accounts:

> Regular Shares
>
> Share Drafts
>
> Club Accounts
>
> Other Shares
>
> Escrow Accounts
>
> IRA/Keogh Retirement Accounts
>
> Share Certificates of Deposit
>
> Unposted Payroll Deduction Shares
>
> Public Unit Shares
>
> Money Market Shares, and
>
> Shares of Nonmembers

Additional sub-accounts of the Regular Shares account may be established
and assigned the next account number in the sequence that the credit
union has established.

The National Credit Union Administration Rules and Regulations Part 707
address the required disclosures for share accounts.

***DEMAND DEPOSITS***

Demand deposits are accounts that may bear interest (dividends) and that
the depositor is entitled to withdraw at any time without prior notice.

Demand deposits equate to Share Drafts accounts in most credit unions.

**Share Draft Accounts**

Traditionally, a Share Draft account is an account from which the holder
is authorized to withdraw shares by means of a negotiable or
transferable instrument or other order. In order to facilitate
monitoring for reporting purposes, any account that is accessible by
draft, except for \"Money Market Shares\" needs to be included in this
account classification. The account should represent the total of all
individual Share Draft accounts as shown on the separate Individual
Share and Loan Ledger subsidiary records. The board of directors may
declare dividends on such accounts as provided in the Federal Credit
Union Act.

***Entries in the Journal and Cash Record***

All entries affecting this account should be recorded in the Journal and
Cash Record; unused Journal and Cash Record columns may be used or the
credit union may use the Journal and Cash Record Continuation Sheet.

#### **Posting to the General Ledger**

Debits and credits to this account in the General Ledger are made by
posting the totals of the Share Draft accounts columns of the Journal
and Cash Record at the end of each month.

***Posting to Members' Accounts***

The individual items which are accumulated in the debit column of the
Journal and Cash Record for Share Draft accounts for monthly posting to
the General Ledger, should also be recorded on the Individual Share and
Loan Ledger and in the Member\'s Passbook or Statement of Account.
Credit entries for deposits to the share draft accounts should be
recorded from Cash Received Vouchers; other credit entries should be
posted from appropriate Journal Vouchers.

***Balancing Individual Share Draft Accounts***

The total of the individual share draft accounts, as shown in the
Individual Share and Loan Ledgers, should be proved with the \"Share
Draft Accounts\" in the General Ledger at least monthly and the listings
retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When a member opens an account or makes a deposit to a Share Draft
    account:

+---+-----------------------------------------+------+-----------------+
| D |                                         | \$20 |                 |
| r |                                         | 0.00 |                 |
| . |                                         |      |                 |
| - |                                         |      |                 |
| - |                                         |      |                 |
| C |                                         |      |                 |
| a |                                         |      |                 |
| s |                                         |      |                 |
| h |                                         |      |                 |
+---+-----------------------------------------+------+-----------------+
|   | > Cr.-Share Draft Accounts              |      | \$200.00        |
+---+-----------------------------------------+------+-----------------+

b)  When a transfer is made from another share account to replenish a
    Share Draft account or to clear an overdraft:

  ------------ --------------------------------------- ------------ -------------
  Dr.-Shares                                           \$50.00      

               Cr.-Share Draft Accounts                             \$50.00
  ------------ --------------------------------------- ------------ -------------

c)  When an overdraft is cleared through a line of credit:

+---+---------------------------------------+-----------+-------------+
| D |                                       | \$50.00   |             |
| r |                                       |           |             |
| . |                                       |           |             |
| - |                                       |           |             |
| L |                                       |           |             |
| i |                                       |           |             |
| n |                                       |           |             |
| e |                                       |           |             |
| s |                                       |           |             |
| o |                                       |           |             |
| f |                                       |           |             |
| C |                                       |           |             |
| r |                                       |           |             |
| e |                                       |           |             |
| d |                                       |           |             |
| i |                                       |           |             |
| t |                                       |           |             |
| t |                                       |           |             |
| o |                                       |           |             |
|   |                                       |           |             |
| M |                                       |           |             |
| e |                                       |           |             |
| m |                                       |           |             |
| b |                                       |           |             |
| e |                                       |           |             |
| r |                                       |           |             |
| s |                                       |           |             |
+---+---------------------------------------+-----------+-------------+
|   | Cr.-Share Draft Accounts              |           | \$50.00     |
+---+---------------------------------------+-----------+-------------+

d)  When a charge is made for issuing drafts to a member:

  ----------- --------------------------------------- ------------ -------------
  Dr.-Share                                           \$6.00       
  Draft                                                            
  Accounts                                                         

              Cr.-Miscellaneous Fee Income                         \$6.00
  ----------- --------------------------------------- ------------ -------------

e)  When a Share Draft is cleared and posted to a member's account:

+---+---------------------------------------+-----------+-------------+
| D |                                       | \$75.00   |             |
| r |                                       |           |             |
| . |                                       |           |             |
| - |                                       |           |             |
| S |                                       |           |             |
| h |                                       |           |             |
| a |                                       |           |             |
| r |                                       |           |             |
| e |                                       |           |             |
| D |                                       |           |             |
| r |                                       |           |             |
| a |                                       |           |             |
| f |                                       |           |             |
| t |                                       |           |             |
| A |                                       |           |             |
| c |                                       |           |             |
| c |                                       |           |             |
| o |                                       |           |             |
| u |                                       |           |             |
| n |                                       |           |             |
| t |                                       |           |             |
| s |                                       |           |             |
+---+---------------------------------------+-----------+-------------+
|   | Cr.-Cash-Share Draft Settlement       |           | \$75.00     |
|   |                                       |           |             |
|   | Account.                              |           |             |
+---+---------------------------------------+-----------+-------------+
|   |                                       |           |             |
+---+---------------------------------------+-----------+-------------+

***Detailed Transactions***

Credit:

a)  With amounts received from share deposits.

b)  With amounts transferred from another share account.

c)  With amounts transferred from a line of credit.

d)  With amounts of dividends applied.

Debit:

a)  With drafts that clear through the Share Draft settlement account.

b)  With service charges, such as costs to issue drafts to members.

***SAVINGS DEPOSITS***

Savings deposits bear interest and have no stated maturity.

Savings deposits include the following types of accounts:

Regular Share Accounts

Money Market Shares

Other Share Accounts

Escrow Accounts

Unposted Payroll Deductions Shares

Public Unit Shares

Shares of Nonmembers

**Regular Share Accounts**

Federal credit unions must make available to its members a share account
which does not require the holder to maintain a minimum balance greater
than the stated par value of one share. This account confers ownership
rights to the member and provides for continued membership in the credit
union. This type of share account is defined as a \"Regular Share
Account.\" The board of directors of any federal credit union may
establish Regular Share accounts with varying dividend rates. Every type
of share account need not receive the same dividend rate, and
accordingly, federal credit unions are authorized to value the dividend
rates on different Regular Share accounts, provided the rates are
established and paid in a nondiscriminatory manner. However, all
accounts within a participating class must receive identical treatment.

Regular Shares represents the total of all members\' Regular Share
accounts as shown on the Individual Share and Loan Ledgers.

***Entries in the Journal and Cash Record***

This account is credited as \"Shares Paid In\" with amounts collected
from members as shown on summary vouchers which represent payments on
shares, and with dividends and interest refunds credited to members
share accounts. This account is debited as \"Shares Withdrawn\" when
amounts are withdrawn or applied on amounts due the credit union.

## Posting to the General Ledger

Debits and credits to this account in the General Ledger are made by
posting the totals of \"Shares\" from the Journal and Cash Record at the
end of each month.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on shares and entrance fees

are received from members:

  ---------- --------------------------------------- ------------ ---------------
  Dr.-Cash                                           \$10.00      

             Cr.-Regular Shares                                   \$8.00

             Cr.-Fees and Charges                                 2.00
  ---------- --------------------------------------- ------------ ---------------

b)  When a member withdraws from his share account:

  ------------- -------------------------------------- ------------ ---------------
  Dr.-Regular                                          \$20.00      
  Shares                                                            

                Cr.-Cash                                            \$20.00
  ------------- -------------------------------------- ------------ ---------------

c)  When a member authorizes the credit union to apply his shares to his
    outstanding loan:

  ------------- ---------------------------------------- --------- ---------------
  Dr.-Regular                                            \$50.00   
  Shares                                                           

                Cr.-Loans                                          \$49.00

                Cr.-Interest on Loans                              1.00

                                                                   
  ------------- ---------------------------------------- --------- ---------------

***Detailed Transactions***

Credit:

a)  With amounts received for share purchases.

b)  With amounts of dividends and interest refunds applied toward the
    purchase of shares.

Debit:

a)  With amounts of withdrawals from share accounts.

b)  With amounts of shares applied on outstanding loans.

***Entries in Member\'s Passbook***

All payments on and withdrawals of shares must be entered in the
Member\'s Individual Share Ledger and on the Member\'s Passbook or
Statement of Account at the time of the receipt of the cash or cash
disbursement.

#### **Postings to Individual Share and Loan Ledger**

The items which are accumulated as \"Shares Withdrawn\" in the Journal
and Cash Record are recorded individually in the member\'s account on
the Individual Share and Loan Ledger \"Shares Paid In\" entries are made
in the Individual Share and Loan Ledger from the Cash Received Voucher.

***Balancing Individual Share Accounts***

The total of the individual Share account balances as shown in the
Individual Share and Loan Ledgers should be balanced with the \"Regular
Shares\" in the General Ledger at least monthly and the trial balance
listings (adding machine tapes or computer trial balance must be
retained).

**Money Market Shares**

This account represents the total of all the individual money market
share accounts as shown on the separate Individual Share and Loan Ledger
subsidiary records established for money market shares.

Generally, a Money Market Share account is a short-term, draft account
designed to pay competitive money market rates.

The specific terms and conditions are determined by the board of
directors of the credit union.

## Entries in the Journal and Cash Record

All entries affecting this account should be recorded in the Journal and
Cash Record columns; unused \"Journal and Cash Record\" columns may be
used or the credit union may use the Journal and Cash Record
continuation Sheet.

***Posting to the General Ledger***

Debits and credits to this account in the General Ledger are made by
posting the totals of the \"Money Market Share Accounts\" column of the
Journal and Cash Record at the end of the month.

#### **Posting to Members' Accounts**

The individual items which are accumulated in the Journal and Cash
Record for Money Market Shares Accounts, for monthly posting to the
General Ledger, should also be recorded on the Individual Share and Loan
Ledger and in the Member\'s Passbook or Statement of Account. Credit
entries for deposits to the Money Market Share Accounts should be
recorded from Cash Received Vouchers; other credit entries should be
posted from the appropriate Journal Vouchers.

***Balancing Individual Money Market Share Accounts***

The total of the individual Money Market Share Accounts as shown in the
Individual Share and Loan Ledgers should be proved with the "Money
Market Share Accounts" in the General Ledger at least monthly and the
listings retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on Money Market Shares are received:

  ---------- --------------------------------------- ------------- --------------------
  Dr.-Cash                                           \$10,000.00   

             Cr.-Money Market Shares                               \$10,000.00
  ---------- --------------------------------------- ------------- --------------------

b)  When dividends are applied to member's Money Market Shares earning a
    daily dividend:

  --------------- --------------------------------------- ------------ -------------
  Dr.-Dividends                                           \$2.00       
  Payable                                                              

                  Cr.-Money Market Shares                              \$2.00
  --------------- --------------------------------------- ------------ -------------

c)  When a Money Market Share Draft is cleared and posted to a member's
    account:

+---+---------------------------------------+---------+---------------+
| D |                                       | \       |               |
| r |                                       | $502.00 |               |
| . |                                       |         |               |
| - |                                       |         |               |
| M |                                       |         |               |
| o |                                       |         |               |
| n |                                       |         |               |
| e |                                       |         |               |
| y |                                       |         |               |
| M |                                       |         |               |
| a |                                       |         |               |
| r |                                       |         |               |
| k |                                       |         |               |
| e |                                       |         |               |
| t |                                       |         |               |
| S |                                       |         |               |
| h |                                       |         |               |
| a |                                       |         |               |
| r |                                       |         |               |
| e |                                       |         |               |
| s |                                       |         |               |
+---+---------------------------------------+---------+---------------+
|   | Cr.-Cash-Money Market Draft           |         | \$502.00      |
|   |                                       |         |               |
|   | Settlement                            |         |               |
+---+---------------------------------------+---------+---------------+

d)  When Money Market Shares are withdrawn (paid to the member):

  ----------- --------------------------------------- ------------ ------------------
  Dr.-Money                                           \$9,500.00   
  Market                                                           
  Shares                                                           

              Cr.-Cash                                             \$9,500.00

                                                                   
  ----------- --------------------------------------- ------------ ------------------

***Detailed Transactions***

Credit:

a)  With amounts received from share deposits.

b)  With amounts transferred from another share account.

c)  With amounts of dividends added to the account.

Debit:

a)  With amounts of withdrawals from the account paid to the member.

b)  With amounts of penalties charged if the account is withdrawn under
    the minimum balance requirement.

c)  With drafts that clear through the money market share settlement
    account.

**Other Share Accounts**

This account represents the balance of share accounts for which no other
provision is made.

Examples include the following:

-   A notice account is an account which requires the holder to give
    written notice of the intent to withdraw.

-   A minimum balance account is an account which requires the holder to
    maintain a specified balance in the account for at least an entire
    dividend period. The board of directors can establish any minimum
    balance they choose.

-   A split rate account is an account which earns dividends at a
    different rate on the portion of the balance above a certain minimum
    requirement.

Further valuations may be established. The board of directors may
declare dividends on such accounts as provided for in Section 117 of the
Federal Credit Union Act.

**Escrow Accounts**

If escrow accounts are required and the borrower is a member, the escrow
account should be maintained as a special limited withdrawal share
account. The escrow account should provide for the accumulation of funds
to pay for not more than one year's taxes, assessments, insurance
premiums, or other charges that could affect the credit union\'s first
lien position. At the time the account is opened, the member-borrower
should be required to sign a blanket withdrawal authorization which
permits the FCU to use the funds to make the required payments. The FCU
should also arrange with each borrower for whom an escrow account is
maintained to promptly submit to the FCU for payment, any statements
received by the borrower relating to taxes, assessments, insurance
premiums and other fees which are to be paid from the escrow account.
Any disbursement made from an escrow account should be supported by such
documents.

Shares in escrow accounts may not be pledged as security for loans nor
may any such shares be applied to loans which are delinquent.
Withdrawals of the amount in excess of that amount required to pay the
fees for which the account was established are permissible at any time.
Other withdrawals, except to pay the fees for which the account was
established are not permissible.

For dividend purposes an escrow account is considered a Regular Share
account. This account should represent the total of all individual
Share-Escrow Accounts as shown on the separate Individual Share and Loan
Ledger subsidiary records. The balance on this account may be combined
with the balance of \"Regular Shares\" for the preparation of the
monthly financial reports.

##  Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record unless, because of
volume, the credit union identifies as separate the credit and/or debit
activity.

***Posting to Members' Accounts***

All payments to, and withdrawals from escrow accounts should be entered
on the Member\'s Passbook or the member\'s Statement of Account at the
time of the receipt or disbursement of cash.

Posting to the Individual Share and Loan Ledger

All receipts and disbursements on escrow accounts should be recorded
individually in the member\'s account in the Individual Share and Loan
Ledger. Shares Paid-In entries are made in the member\'s Passbook or the
Member\'s Statement of Account and the Individual Cash Received Voucher;
Shares Withdrawn entries are made from the Journal Voucher.

## Balancing Individual Escrow Accounts

The total of the individual share accounts for escrow accounts as shown
in the separate Individual Share and Loan Ledger should be proved with
the "escrow account" in the General Ledger at least monthly and the
listings retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To record receipt of funds from settlement on real estate loan
    (hazard insurance-\$30; Mortgage insurance-\$20; Property
    Taxes-\$317):

  ---------- --------------------------------------- ---------- ----------------
  Dr.-Cash                                           \$367.00   

             Cr.-Escrow Accounts                                \$367.00
  ---------- --------------------------------------- ---------- ----------------

b)  To record payment of real estate property taxes from Escrow Account:

  ------------ --------------------------------------- ---------- ----------------
  Dr.-Escrow                                           \$317.00   
  Accounts                                                        

               Cr.-Cash                                           \$317.00

                                                                  
  ------------ --------------------------------------- ---------- ----------------

***Detailed Transactions***

Credit:

a)  With amounts received at settlement on real estate loan.

b)  With amounts received from a real estate borrower on a periodic
    basis.

Debit:

a)  With amounts for payment of taxes, insurance, etc., for which the
    Escrow Account was established.

b)  With withdrawals of amounts in excess of the amount required to pay
    fees for which the account was established.

**Unposted Payroll Deductions**

This account is used for processing payroll deductions made from
members\' paychecks by their employer(s). This account should represent
the accumulated amount of payroll deductions not yet distributed to
\"Regular Shares," \"Loans,\" and \"Interest on Loans,\" etc. Any amount
in this account at month end should be combined with the amount in
\"Regular Shares\" in the monthly financial report.

***Entries in the Journal and Cash Record***

All entries affecting this account should be recorded as
\"Miscellaneous".

***Detailed Transactions***

Credit:

a)  With the total of each periodic payroll deduction received.

    Debit:

b)  With the total of payroll deductions previously credited to this
    account when applied to appropriate accounts; e.g., \"Regular
    Shares", "Loans", "Interest on Loans", etc.

##### Public Unit Shares

A *public unit account* represents share deposits made by a governmental
unit, e.g., city, county and so on as authorized by Section 107(6) of
the Federal Credit Union Act and defined in Part 745.1 of the NCUA Rules
and Regulations. These accounts could be regular share, share draft, or
share certificate accounts. Normally, these accounts are of a highly
volatile nature and the credit union needs to use caution in managing
them. Refer to Parts 701.32 and 745.10 of the NCUA Rules and Regulations
for more information.

If funds are received from more than one public unit, separate ledgers
shall be maintained for each unit. For accounting purposes, public funds
will be entered in the General Ledger under Shares-Public Unit Accounts.

## 

## Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record unless, because of
volume, the credit union identifies as separate the credit and/or debit
activity.

***Posting to Members' Accounts***

All payments and withdrawals on Public Unit Shares should be entered on
the custodian\'s Passbook or the Statement of Account at the time of
receipt or disbursement of cash.

Posting to the Individual Share and Loan Ledger

All payments by custodians on Public Unit Shares should be recorded
individually in the

shareholder's account in the Individual Share and Loan Ledger. \"Shares
Paid In\" entries are made in the Individual Share and Loan Ledger from
the Cash Received Voucher.

## Balancing Individual Public Unit Share Accounts

The total of the individual share accounts for Public Unit Shares as
shown in the separate Individual Share and loan ledgers must be proved
with this "Public Unit Shares" account in the General Ledger at least
monthly and the listings retained in the file.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on Public Unit Shares are received:

  ---------- --------------------------------------- ------------ -------------
  Dr.-Cash                                           \$60.00      

             Cr.-Shares-Public Unit Accounts                      \$60.00
  ---------- --------------------------------------- ------------ -------------

a)  When dividends are applied to Public Unit Share Accounts:

  --------------- --------------------------------------- ------------ -------------
  Dr.-Dividends                                           \$5.00       
  Payable                                                              

                  Cr.-Shares- Public Unit Accounts                     \$5.00
  --------------- --------------------------------------- ------------ -------------

a)  When Public Unit Shares are withdrawn (paid to shareholder):

+---+---------------------------------------+---------+---------------+
| D |                                       | \       |               |
| r |                                       | $125.00 |               |
| . |                                       |         |               |
| - |                                       |         |               |
| S |                                       |         |               |
| h |                                       |         |               |
| a |                                       |         |               |
| r |                                       |         |               |
| e |                                       |         |               |
| s |                                       |         |               |
| - |                                       |         |               |
| P |                                       |         |               |
| u |                                       |         |               |
| b |                                       |         |               |
| l |                                       |         |               |
| i |                                       |         |               |
| c |                                       |         |               |
| U |                                       |         |               |
| n |                                       |         |               |
| i |                                       |         |               |
| t |                                       |         |               |
|   |                                       |         |               |
| A |                                       |         |               |
| c |                                       |         |               |
| c |                                       |         |               |
| o |                                       |         |               |
| u |                                       |         |               |
| n |                                       |         |               |
| t |                                       |         |               |
| s |                                       |         |               |
+---+---------------------------------------+---------+---------------+
|   | Cr.-Cash                              |         | \$125.00      |
+---+---------------------------------------+---------+---------------+
|   |                                       |         |               |
+---+---------------------------------------+---------+---------------+

***Detailed Transactions***

Credit:

a)  With amounts received for share purchase.

b)  With amounts of dividends applied toward the purchase of shares.

Debit:

a)  With amounts of withdrawals of Public Unit Shares.

# Shares of Nonmembers

A *nonmember share account* represents the shareholdings of other
federally insured credit unions and, in the case of credit unions
serving predominantly low-income members, the shareholdings of nonmember
individuals or organizations. Refer to Parts 701.32 and 701.34 of the
NCUA Rules and Regulations for more information.

Each share account must be maintained on an Individual Share Ledger
record and must be kept separate from the members' individual share
accounts.

## Entries in the Journal Cash Record

Transactions involving this account should be maintained separately from
the Regular Share transactions recorded in the \"Shares\" columns. If
there are a number of transactions each month, separation should be
provided in the Journal and Cash Record. If there are relatively few
transactions \"Miscellaneous\" grouping may be used.

## Posting to Members' Accounts

All payments on shares and withdrawals of shares should be entered in
the nonmember\'s passbook or the Statement of Account, at the time of
the receipt or disbursement of cash.

## Posting to the Individual Share and Loan Ledger

Share withdrawal items recorded in the Journal and Cash Record are also
recorded individually in the nonmember's' account in the Individual
Share Ledger. Share Paid In entries are made in the nonmember\'s
Individual Share Ledger from the Cash Received Voucher.

***Balancing Individual Nonmember Share Accounts***

The total of the individual nonmember share accounts as shown in their
individual ledgers should be proved with the \"Shares of Nonmembers\" in
the General Ledger at least monthly and the listing retained in the
files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on shares are received from nonmembers:

  ---------- --------------------------------------- ---------- ----------------
  Dr.-Cash                                           \$300.00   

             Cr.-Shares of Nonmembers                           \$300.00
  ---------- --------------------------------------- ---------- ----------------

b)  When a nonmember withdraws from his share account:

  ------------ --------------------------------------- ---------- ----------------
  Dr.-Shares                                           \$250.00   
  of                                                              
  Nonmembers                                                      

               Cr.-Cash                                           \$250.00

                                                                  
  ------------ --------------------------------------- ---------- ----------------

***Detailed Transactions***

Credit:

a)  With amounts received for share purchases.

b)  With amounts of dividends applied toward the purchases of shares of
    nonmembers.

Debit:

a)  With amounts of withdrawals from share accounts by nonmembers.

***TIME DEPOSITS***

Time deposits bear interest for a fixed, stated period of time.

Time deposits include the following types of accounts:

> IRA/Keogh Retirement Accounts
>
> Share Certificates of Deposit
>
> Club Accounts
>
> Brokered Deposits

**Ira/Keogh Retirement Accounts**

Federal credit unions are free to design Individual Retirement Accounts
(IRA) in any manner they choose, without any maturity or dividend
ceiling restrictions. Members may be permitted to convert any share,
share certificate, or share draft account to an IRA without penalty. Any
taxpayer can open an IRA account.

The members should be advised to consult their tax advisers to determine
the deductibility of their contributions. The credit union should
refrain from offering tax advice.

This account represents the total of all individual share accounts
established pursuant to Sections 401(d) and 408 of the Internal Revenue
Code as shown on the separate Individual Share and Loan ledger
subsidiary records. Shares in this account may not be pledged as
security for loans nor may such shares be applied to loans which are
delinquent. Withdrawals from these accounts are subject to restrictions
as specified in the individual trust or custodial agreements.

The credit union in its capacity of trustee for these accounts must
comply with certain reporting requirements as established by the
Internal Revenue Code.

A properly-completed, duly-approved application for membership plus an
initial payment into a share account established for retirement purposes
under a trust or custodial agreement is sufficient to qualify for
membership. A companion Regular Share account is not required for
membership.

## Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and

Cash Record unless, because of volume, the credit union identifies
separate grouping for the credit and/or debit activity.

## Postings to Members' Accounts

All payments on Retirement Plan Shares and withdrawals should be entered
on the member\'s Passbook or Statement of Account at the time of the
receipt or disbursement of cash.

***Posting to the Individual Share and Loan Ledger***

All payments by members on Retirement Plan Shares should be recorded
individually in the member\'s account in the Individual Share and Loan
Ledger. Shares Paid In entries are made in the Share and Loan Ledger
from the Cash Received Voucher.

***Balancing Individual IRA/Keogh Retirement Accounts***

The total of the individual share accounts for IRA/Keogh retirement plan
shares as shown in the separate Individual Share and Loan ledgers should
be proved with "IRA/Keogh Retirement Plan Shares" account in the General
Ledger at least monthly and the listings retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on Retirement Plan Shares are received:

  ---------- --------------------------------------- ------------ -------------
  Dr.-Cash                                           \$60.00      

             Cr.-Shares-Retirement Plans                          \$60.00
  ---------- --------------------------------------- ------------ -------------

b)  When dividends are applied to Retirement Plan Shares of members:

  --------------- --------------------------------------- ------------ -------------
  Dr.-Dividends                                           \$5.00       
  Payable                                                              

                  Cr.-Shares-Retirement Plans                          \$5.00
  --------------- --------------------------------------- ------------ -------------

c)  When Retirement Plan Shares are withdrawn (paid to member):

  ----------------------- ----------------------------------------- ---------- ---------------
  Dr.-Shares-Retirement                                             \$125.00   
  Plans                                                                        

                          Cr.-Cash                                             \$125.00

                                                                               
  ----------------------- ----------------------------------------- ---------- ---------------

***Detailed Transactions***

Debit:

a)  With amounts of withdrawals of retirement plan shares.

b)  With amounts of fees assessed for trusts or custodial services.

Credit:

a)  With amounts received for share purchases.

b)  With amounts of dividends applied toward the purchase of shares.

**Share Certificates of Deposit**

This account represents the total of all individual share certificate
accounts as shown on the separate Individual Share and Loan Ledger
subsidiary records established for the share certificates.

## Entries in the Journal and Cash Record

All entries affecting this account should be entered separately in the
Journal and Cash Record or Journal and Cash Record (Continuation Sheet).

***Posting to Members' Accounts***

All payments on Share Certificate accounts and

withdrawals should be entered on the Member\'s Passbook or the Member\'s
Statement of Account, at this time of the receipt or disbursement of
cash.

***Posting to the Individual Share and Loan Ledger***

All payments and withdrawals by members on

Share Certificate accounts should be recorded individually in the
member\'s certificate account in the Individual Share and Loan Ledger.
Shares Paid In entries are made in the Individual Share and Loan Ledger
from the Cash Received Voucher.

***Balancing Individual Share Certificate Accounts***

The total of the individual share certificate accounts for Share
Certificates as shown in the separate Individual Share and Loan Ledger
should be proved with the "Share Certificate" account in the General
Ledger at least monthly and the listings retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on Share Certificates are received:

  ---------- --------------------------------------- ------------- --------------------
  Dr.-Cash                                           \$10,000.00   

             Cr.-Share Certificates                                \$10,000.00
  ---------- --------------------------------------- ------------- --------------------

b)  When dividends are applied to Share Certificates of members:

  --------------- --------------------------------------- ---------- -----------------
  Dr.-Dividends                                           \$700.00   
  Payable                                                            

                  Cr.-Share Certificates                             \$700.00
  --------------- --------------------------------------- ---------- -----------------

c)  When Share Certificates are withdrawn (paid to member):

  -------------- --------------------------------------- ------------- --------------------
  Dr.-Share                                              \$10,700.00   
  Certificates                                                         

                 Cr.-Cash                                              \$10,700.00

                                                                       
  -------------- --------------------------------------- ------------- --------------------

***Detailed Transactions***

Credit:

a)  With amounts received for certificates purchase.

b)  With amounts of dividends added to the account.

Debit:

a)  With amounts of withdrawals from the certificates.

b)  With amounts of penalty charges for premature withdrawals.

**Club Accounts**

A credit union may, if the board of directors deems it desirable, permit
more than one share account for each member. These additional accounts
may be opened for certain purposes such as Christmas savings, vacations,
and savings for an educational fund. The member retains full control
over his/her Club accounts, as with a Regular Share account, subject to
the terms and conditions set by the board of directors. If club accounts
are used, they should be included with the member\'s Regular account in
determining whether the shares held by him have exceeded the limit set
by the board of directors. If a member is permitted to establish a club
account, it should be indicated on the share trial balance and/or share
ledger somewhat as follows:

> \"John Jones\", Club Share Account. The accounts should either be
> numbered consecutively such as Club Account No. 1, No. 2, etc., or be
> titled by the type of account, such as Christmas Savings, Share
> Account, Vacation Share Account, and so on.

The credit union may segregate the different valuations of Club Accounts
in separate General Ledger accounts (i.e., for Christmas Savings and for
Vacation Savings). The balances of these segregated Club accounts may be
combined with the balance of \"Regular Shares\" for the preparation of
the monthly financial reports. The balance of each segregated Club
Account must equal the total of the individual accounts for each
valuation of Club Account. The balancing should be done at least
monthly.

***Posting Payments and Withdrawals to Club Accounts***

All entries affecting this account should be recorded in the Journal and
Cash Record. Total debits and credits to this account in the General
Ledger are made by posting the totals of the \"Club Accounts\" in the
Journal and Cash Record at the end of each month. The individual
payments on and withdrawals of club shares should also be entered in the
member\'s Individual Share Ledger and on the Member\'s Passbook or
Statement of Account at the time of the receipt or cash disbursement.

**Brokered Deposits**

Brokered deposits are third-party deposits placed by or with the
assistance of a deposit broker. Deposit brokers sometimes sell interests
in deposits placed with third-parties. Section 701.32(b) of the NCUA
Rules and Regulations restricts nonmember accounts, including brokered
deposits, to 20 percent of the total shares of a federal credit union,
or \$1.5 million, whichever is greater.

## Entries in the Journal and Cash Record

All entries affecting this account should be entered separately in the
Journal and Cash Record or Journal and Cash Record (Continuation Sheet).

## Posting to Members' Accounts

All payments on Brokered Deposit accounts and withdrawals should be
entered on the nonmember passbook or the Statement of Account, at the
time of the receipt or disbursement of cash.

Posting to the Individual Share and Loan Ledger

All payments and withdrawals on Brokered De-

posits accounts should be recorded individually in the nonmember\'s
certificate account in the Individual Share and Loan Ledger. Shares Paid
In entries are made in the Individual Share and Loan Ledger from the
Cash Received Voucher.

## Balancing Individual Brokered Deposits

The total of the individual brokered deposit accounts as shown in the
separate Individual Share and Loan Ledger should be proved with the
"Brokered Deposits" account in the General Ledger at least monthly and
the listings retained in the files.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When payments on Brokered Deposits are received:

  ---------- ---------------------------- ---------------- ----------------------
  Dr.-Cash                                \$100,000        

             Cr.-Brokered Deposits                         \$100,000
  ---------- ---------------------------- ---------------- ----------------------

b)  When dividends are applied to Brokered Deposits of nonmembers:

  --------------- ----------------------------------- ------------- -----------------
  Dr.-Dividends                                       \$700         
  Payable                                                           

                  Cr.-Brokered Deposits                             \$700
  --------------- ----------------------------------- ------------- -----------------

c)  When Brokered Deposits are withdrawn (paid to nonmember):

  -------------- ----------------------------------- ----------- ----------------------
  Dr.-Brokered                                       \$100,700   
  Deposits                                                       

                 Cr.-Cash                                        \$100,700

                                                                 
  -------------- ----------------------------------- ----------- ----------------------

***Detailed Transactions***

Credit:

a)  With amounts received for brokered deposits.

b)  With amounts of dividends added to the account.

Debit:

a)  With amounts of withdrawals from the brokered deposits.

b)  With amounts of penalty charges for premature withdrawals.

######## DEFINITIONS

*Share Account*-refers to a regular share account and any other account
that is not a share certificate account. A regular share account is an
account that does not require a holder to maintain a balance greater
than the par value and one that does not require notice of intent to
withdraw, except as may be imposed in accordance with the Federal Credit
Union Bylaws, and that qualifies for a dividend.

*Share Draft Account*-means an account from which the holder is
authorized to withdraw shares by means of a negotiable or transferable
instrument or other order.

*Share Certificate Account*-refers to an account that will earn
dividends at a specified rate for a specified period of time, if held to
maturity, upon which a penalty may be assessed for premature withdrawal
prior to maturity.

*Premature Withdrawal*-refers to an early withdrawal of all or any
portion of the principal amount of a share or share certificate account
prior to its maturity. It also refers to the withdrawal of all or any
portion of the principal amount prior to providing any required notice
of withdrawal.

*MICR* stands for Magnetic Ink Character Recognition and refers to the
numbering printed in magnetic ink at the bottom of each share draft.

*Payable through bank* means a bank that has been designated to make
presentment of a share draft to the federal credit union for payment.

*Payable at bank* means a draft drawn on the credit union that is
payable at any correspondent or Federal Reserve Bank. It is payable when
it falls due out of any funds of the maker or acceptor. The bank is
expected to make payment without consulting the credit union. In this
situation the draft is endorsed, \"Payable at any bank\" and it bears
the routing and transit number of the credit union.

*Truncation*-means the original negotiable or transferable instrument is
not returned to the drawer.

PROCESSING BASIC SHARE TRANSACTIONS

**When Payments On Shares Are Received**

When cash is received for payment on shares or share certificates, a
Cash Received Voucher should be prepared for the date of receipt in the
credit union office. The amount to be credited to the member\'s
account(s) is written in the space opposite \"Shares\". The total cash
received is written in the space opposite \"Total\" and should equal the
actual cash received. The person who received the cash for the credit
union should initial the voucher in the space opposite \"Received by.\"

After the payment is entered in the member\'s passbook, the balance
shown in the passbook should be entered in the proper spaces under
\"Member\'s Passbook Balances\" on the Cash Received Voucher. This will
serve as a comparison of the member\'s passbook with the credit union\'s
records when posting to the Individual Share and Loan Ledger and will
often disclose errors which may occur, thus saving time in balancing the
individual share ledgers with the General Ledger Account, \"Shares\", at
the end of the month.

When cash is received from a member with an accompanying Cash Received
Voucher, the amount received should immediately be entered in the
member\'s passbook which is then returned to the member. No further
receipt is necessary.

Each item of cash received which involves a member\'s share draft and/or
share certificate account should be posted individually from the Cash
Received Voucher to the \"Paid In\" column of the member\'s Individual
Share Ledger account. To make posting easier, it is suggested that the
Cash Received Vouchers be sorted in numerical order by account number.
To assist in keeping track of what accounts have been posted, as each
account is posted a check mark can be made in the space provided on the
Cash Received Voucher.

# When Shares Are Withdrawn

When a member wishes to withdraw some of his/her shares or share
certificates, a Journal Voucher should be prepared. If the shares to be
withdrawn are pledged as security on a loan and the shares remaining
after the withdrawal would be less than the member\'s direct or indirect
liability to the credit union, or if the member\'s loan or a loan for
which he cosigned is delinquent, the form should be initialed by the
chairman or secretary of the credit committee or a loan officer showing
approval for the withdrawal. If any person cosigned a loan for which the
member\'s shares are pledged, that person\'s approval should also be
obtained before the shares are released. Otherwise, the cosigner may be
relieved of liability on the cosigned loan. The cosigners can indicate
their approval by signing on the space \"Authorized or Approved By\" on
the Journal Voucher form. Some written evidence of the co maker's
approval is essential.

The date and amount of the withdrawal should be entered in the member\'s
passbook under the applicable headings \"Shares\", \"Date\" and
\"Withdrawn.\" The amount of withdrawal should be deducted from the
balance and the new balance remaining in shares and/or share
certificates should be entered in the column \"Balance\". The entry
should be initialed by the person paying out the money for the credit
union.

Each item of cash paid out which involves a member\'s share or share
certificate account should be posted individually from the Journal and
Cash Record or a Journal Voucher to the Individual Shares Ledger account
of the member. A share withdrawal is posted as \"Withdrawn\" in the
Shares Ledger and deducted from the previous share or share certificate
balance. The new balance is identified as the new \"Balance.\"

+-------------------------------------------------------+--------------+
|                                                       | **Page No.** |
+-------------------------------------------------------+--------------+
| **MEMBERS' EQUITY**                                   | **17**       |
+-------------------------------------------------------+--------------+
| > ***UNINSURED SECONDARY CAPITAL***                   | > **17**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **19**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **19**     |
+-------------------------------------------------------+--------------+
| > ***REGULAR RESERVE***                               | > **20**     |
+-------------------------------------------------------+--------------+
| > ***Net Worth Ratio Classification***                | > ***20***   |
+-------------------------------------------------------+--------------+
| > ***Total Assets***                                  | > ***20***   |
+-------------------------------------------------------+--------------+
| > **Calculation Effective Date**                      | > **21**     |
+-------------------------------------------------------+--------------+
| > **Statutory Net Worth Categories**                  | > **21**     |
+-------------------------------------------------------+--------------+
| > **Earnings Transfers**                              | > **22**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **22**     |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **22**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **22**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **23**     |
+-------------------------------------------------------+--------------+
| > **Special Reserve**                                 | > **23**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **23**     |
+-------------------------------------------------------+--------------+
| > ***UNDIVIDED EARNINGS***                            | > **23**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **24**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **24**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **24**     |
+-------------------------------------------------------+--------------+
| > **Appropriated Undivided Earnings**                 | > **25**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **25**     |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **25**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **25**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **25**     |
+-------------------------------------------------------+--------------+
| > **Reserve for Loss Contingencies**                  | > **25**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **26**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **26**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **26**     |
+-------------------------------------------------------+--------------+
| > **Reserve for Nonconforming Investments**           | > **26**     |
+-------------------------------------------------------+--------------+
| > ***ACCUMULATED OTHER COMPREHENSIVE INCOME           | > **27**     |
| > (Unrealized G/L on AFS)***                          |              |
+-------------------------------------------------------+--------------+
| > ***DONATED EQUITY***                                | > **27**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **27**     |
+-------------------------------------------------------+--------------+
| > ***NET INCOME (LOSS)***                             | > **28**     |
+-------------------------------------------------------+--------------+
| > ***Entries in Journal and Cash Record***            | > **28**     |
+-------------------------------------------------------+--------------+
| > ***Posting to the General Ledger***                 | > **28**     |
+-------------------------------------------------------+--------------+
| > ***Illustrative Entries***                          | > **28**     |
+-------------------------------------------------------+--------------+
| > ***Detailed Transactions***                         | > **29**     |
+-------------------------------------------------------+--------------+

###### MEMBERS' EQUITY 

###### 

###### UNINSURED SECONDARY CAPITAL

Federally insured credit unions designated as low-income are authorized
to establish secondary capital accounts. The increased capital is
intended to enable those credit unions to support greater lending and
improve other financial services for the limited income groups and
communities they serve. Certain restrictions are placed on these
accounts, foremost among them is that the accounts may be *offered only
to organizational investors*, not to natural person members or other
natural person investors. Other key restrictions are:

-   The accounts are not insured by the NCUSIF or any other government
    entity, and may not be offered as share accounts. They will take the
    form of subordinated debt.

-   The funds in the accounts must be available to cover losses, after
    reserves and undivided earnings, but prior to liquidation.

-   The accounts must have a minimum maturity of 5 years.

-   The accounts may not be used as security on other obligations of the
    account holder.

-   The accounts will not "carry over" as secondary capital in the event
    of merger into a credit union that is not low-income designated.

    A declining scale for the capital value of accounts with less than 5
    years remaining maturity has been established. All funds, however,
    will continue to be at risk to cover losses that exceed reserves and
    undivided earnings. Accounts with remaining maturities of at least:

-   4 years, but less than 5 years are counted as capital at 80 percent
    of face value;

-   3 years, but less than 4 years are counted as capital at 60 percent
    of face value;

-   2 years, but less than 3 years are counted as capital at 40 percent
    of face value;

-   1 year, but less than 2 years are counted as capital at 20 percent
    of face value; and

-   less than one year remaining maturity will be counted as capital at
    0 percent of face value.

A disclosure and acknowledgment must be provided and executed by an
authorized representative of the account holder. State-chartered,
federally insured credit unions may establish these accounts in
accordance with the terms and conditions authorized for federal credit
unions and to the extent they are not inconsistent with applicable state
law, regulation, and accounting requirements.

A regulatory accounting position (RAP) has been taken to establish these
accounts and to recognize them as secondary capital. These accounts are
subordinated debt and the account holder does not have voting or
ownership rights. Credit unions should record the amount of secondary
capital in the equity section of the balance sheet, although any
secondary capital that has a remaining maturity of less than 5 years
will be split into capital and liability components based on a sliding
scale. To be consistent with generally accepted accounting principles
(GAAP), the credit union's outside auditor may recognize accounts
established as secondary capital as subordinated debt, and for financial
statement presentation purposes, may reflect the entire balance in these
accounts in the liability section of the balance sheet.

Credit unions must adopt a [written]{.underline} plan for use of the
funds in the accounts and subsequent liquidity needs to meet repayment
requirements upon maturity.

The secondary capital accounts may not be established as share accounts
and, therefore, will be considered a form of subordinated debt, in
effect a borrowing. In most cases of borrowed funds, the stated interest
rate is guaranteed contrary to dividends on share deposits for credit
unions which are limited to the amount of funds available from earnings,
both current and accumulated. The credit union should consider its
ability to meet the interest payment obligation in light of its current
and accumulated earnings. Interest payable on these accounts
[must]{.underline} be accrued at least monthly. The credit union should
consider the effect on regular members' dividends when setting the
interest rate or index for these accounts.

Section 107(9) of the Federal Credit Union Act limits a credit union's
borrowing to 50 percent of its paid-in and unimpaired capital and
surplus. The amount held in secondary capital accounts held by
low-income credit unions is to be included in total borrowings for
purposes of this limitation. Secondary capital accounts, plus any other
borrowings by the low-income credit union will not exceed the 50 percent
limit.

Part 705 of the NCUA Rules and Regulations addresses the Community
Development Revolving Loan Program for Credit Unions. A credit union
participating in the program may receive up to \$300,000 in the form of
a loan. A matching requirement encourages credit unions to develop a
permanent source of *member shares* within one year of loan approval.

Accounts established as secondary capital by low-income designated
credit unions may [not]{.underline} be used as a source of matching
funds for this program. First, secondary capital is not a *member share*
and second, the regulation requires that the credit union maintain the
increase in the total amount of *share deposits* for the duration of the
loan from the program. These accounts "may not be offered as share
accounts."

Uninsured secondary capital accepted from a non-natural person investor
should be recorded as follows:

***Entries in the Journal and Cash Record***

All entries affecting this account should be recorded as "Miscellaneous"
in the Journal and Cash Record

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  When a low-income designated credit union accepts a secondary
    capital account of \$100,000 with a 6-year maturity from a
    non-natural person investor:

+---+------------------------------------+------+---------------------+
| D |                                    | \    |                     |
| r |                                    | $100 |                     |
| . |                                    | ,000 |                     |
| - |                                    |      |                     |
| C |                                    |      |                     |
| a |                                    |      |                     |
| s |                                    |      |                     |
| h |                                    |      |                     |
+---+------------------------------------+------+---------------------+
|   | Cr.-Uninsured Secondary            |      | \$100,000           |
|   |                                    |      |                     |
|   | Capital                            |      |                     |
+---+------------------------------------+------+---------------------+

b)  When the remaining maturity of the above account is between 4 and 5
    years the following adjusting entry should be recorded to reflect
    only 80 percent of the account as secondary capital:

+---+--------------------------------------+------+--------------------+
| D |                                      | \$20 |                    |
| r |                                      | ,000 |                    |
| . |                                      |      |                    |
| - |                                      |      |                    |
| U |                                      |      |                    |
| n |                                      |      |                    |
| i |                                      |      |                    |
| n |                                      |      |                    |
| s |                                      |      |                    |
| u |                                      |      |                    |
| r |                                      |      |                    |
| e |                                      |      |                    |
| d |                                      |      |                    |
| S |                                      |      |                    |
| e |                                      |      |                    |
| c |                                      |      |                    |
| o |                                      |      |                    |
| n |                                      |      |                    |
| d |                                      |      |                    |
| a |                                      |      |                    |
| r |                                      |      |                    |
| y |                                      |      |                    |
|   |                                      |      |                    |
| C |                                      |      |                    |
| a |                                      |      |                    |
| p |                                      |      |                    |
| i |                                      |      |                    |
| t |                                      |      |                    |
| a |                                      |      |                    |
| l |                                      |      |                    |
+---+--------------------------------------+------+--------------------+
|   | Cr.-Subordinated CDCU                |      | \$20,000           |
|   |                                      |      |                    |
|   | Debt                                 |      |                    |
+---+--------------------------------------+------+--------------------+
|   |                                      |      |                    |
+---+--------------------------------------+------+--------------------+

[Note]{.underline}: In the event that a low-income credit union has
depleted its reserves and undivided earnings and incurs an operating
loss, the loss, as realized, will be distributed pro rata among the
current secondary capital account holders. For example, a credit union
has 5 secondary capital investors, each depositing \$100,000 for total
secondary capital of \$500,000. The credit union incurs an operating
loss of \$120,000; each account will be debited for \$24,000. The
remaining balance in each account will be \$76,000, with a total
remaining secondary capital of \$380,000. A credit union that has funds
split between "Uninsured Secondary Capital" and "Subordinated CDCU Debt"
should first absorb any pro rata loss from "Subordinated CDCU Debt",
with any remaining loss carried over to "Uninsured Secondary Capital".

If a secondary capital account holder wishes to withdraw the investment
at maturity, the credit union must determine losses as of the previous
month end and allocate the loss, again on a pro rata basis to all
account holders, prior to releasing the funds. Keep in mind that all
funds will continue to be at risk to cover losses that exceed reserves
and undivided earnings regardless of their capital values based on their
final maturities.

***REGULAR RESERVE***

Consistent with requirements of the Federal Credit Union Act as amended
by the Credit Union Membership Access Act (CUMAA) and implemented by the
NCUA Board in it's Rules and Regulations §702, a credit union must
determine its net worth category classification at the end of each
calendar quarter and subsequently set aside accumulated earnings in its
Regular Reserve account. The net worth ratio calculation and mandated
transfer requirements are discussed below.

**[Note]{.underline}: Risk based net worth requirements (RBNW) are not
discussed in this Manual because this Manual is targeted to credit
unions under \$10 million in assets; credit unions which are also
excluded through rulemaking from the RBNW requirements. If a credit
union's assets grow to over \$10 million, it should be aware additional
RBNW transfers may be required. See the NCUA Rules & Regulations §702.**

**Net Worth Ratio Calculation**

All credit unions must determine their net worth category classification
at the end of each calendar quarter. Required transfers to the Regular
Reserve are dependent on the net worth ratio calculation and related net
worth classification.

The net worth ratio is calculated as:

*Net Worth* divided by *Total Assets*.

***Net Worth***. For purposes of this calculation, the "net worth"
numerator is GAAP (generally accepted accounting principles) retained
earnings consisting of undivided earnings, regular reserves, and any
other appropriations of undivided earnings designated by management,
regulatory authorities or the board. Appropriations are amounts which
have flowed through the income statement to undivided earnings and then
have been set aside in an appropriation for a given purpose. For low
income-designated credit unions, by law, net worth also includes
secondary capital accounts that are uninsured and subordinate to all
other claims.

Net worth includes amounts the credit union had previously closed from
net income into undivided earnings. If the credit union does not close
its net income into undivided earnings during interim periods, examiners
will treat the net income as if it had been closed into undivided
earnings.

Net worth does not include the:

1.  Allowance for Loan & Lease Losses;

    Contributions of tangible fixed-assets recorded as "Donated Equity"
    per regulatory accounting practice (RAP);

    Unrealized Gains or Losses on Available for Sale Securities and/or
    other items of Other Comprehensive Income; or

    Alternative sources of capital (e.g., paid-in-capital accounts),
    except that for low-income designated credit unions, net worth
    includes uninsured secondary capital accounts subordinate to claims
    of creditors, shareholders, and the NCUSIF. This exception applies
    only to low-income credit unions.

***Total Assets***. A credit union can choose its method for determining
the "total assets" denominator as measured by [one]{.underline} of the
following:

1.  [Average quarterly balance]{.underline} - the average of quarter-end
    balances of the four most recent calendar quarters; or

    [Average monthly balance]{.underline} - the average of month-end
    balances over the three calendar months of the calendar quarter; or

    [Average daily balance]{.underline} - the average daily balance over
    the calendar quarter; or

    [Quarter-end balance]{.underline} - the quarter-end balance of the
    calendar quarter as reported on the credit union's quarterly call
    report and as calculated on the PCA worksheet.

For each quarter, credit unions will elect which method of determining
total assets they will use for that specific quarter to determine the
net worth ratio and, if applicable, the earnings transfer and asset
growth restriction. This method also applies in the determination of
whether or not a credit union is a new credit union. It does not apply
to risk-based net worth for complex credit unions.

# Calculation Effective Date

The effective date of the credit union's net worth category
classification is the most recent of the following:

1.  The last day of the calendar month following the end of the calendar
    quarter; or

    The date the credit union's net worth ratio is recalculated by or as
    a result of its most recent final examination report; or

    The date the credit union received written notice from NCUA or, if
    state-chartered, the appropriate State official, of reclassification
    on safety and soundness grounds as provided under §702.102(b) or
    §702.302(d).

## Statutory Net Worth Categories

Illustration 3-A below shows the net worth categories for all credit
unions. The left side shows net worth categories for credit unions other
than those defined as new. The right side shows net worth categories for
credit unions defined by statute as new (less than 10 years in operation
and less than \$10 million in assets).

One must recognize that new credit unions initially have no net worth
and that they need reasonable time in which to accumulate it.
Illustration 3-B is an example of a reasonable (although not a
mandatory) timetable for building net worth.

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

> **Other Than New Credit Unions New Credit Unions**

+----------------------+-----------+---+------------------+-----------+
| **Net Worth          | **Net     |   | **Net Worth      | **Net     |
| Category**           | Worth     |   | Category**       | Worth     |
|                      | Ratio**   |   |                  | Ratio**   |
+----------------------+-----------+---+------------------+-----------+
| Well Capitalized     | 7% or     |   | Well Capitalized | 7% or     |
|                      | greater   |   |                  | greater   |
+----------------------+-----------+---+------------------+-----------+
| Adequately           | 6% to     |   | Adequately       | 6% to     |
| Capitalized          | 6.99%     |   | Capitalized      | 6.99%     |
+----------------------+-----------+---+------------------+-----------+
| Undercapitalized     | 4% to     |   | Moderately       | 3.5% to   |
|                      | 5.99%     |   | Capitalized      | 5.99%     |
+----------------------+-----------+---+------------------+-----------+
| First Tier           | 5% to     |   | Marginally       | 2% to     |
|                      | 5.99%     |   | Capitalized      | 3.49%     |
+----------------------+-----------+---+------------------+-----------+
| Second Tier          | 4% to     |   | Minimally        | 0% to     |
|                      | 4.99%     |   | Capitalized      | 1.99%     |
| (and failed RBNW)    |           |   |                  |           |
+----------------------+-----------+---+------------------+-----------+
| Significantly        | 2% to     |   | Undercapitalized | Less than |
| Undercapitalized     | 3.99%     |   |                  | 0%        |
+----------------------+-----------+---+------------------+-----------+
| Critically           | Less than |   |                  |           |
| Undercapitalized     | 2%        |   |                  |           |
+----------------------+-----------+---+------------------+-----------+

Illustration 3-A

###### Reasonable Timetable to Build Net Worth

  ------------------------------------------- ---------------------------
  **Within \# of Years in Operation**         **Net Worth Ratio**

  3 Years                                     0% to 1.99%

  5 Years                                     2% to 3.49%

  7 Years                                     3.5% to 5.99%

  10 Years                                    6% to 6.99%
  ------------------------------------------- ---------------------------

Illustration 3-B

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

# Earnings Transfers

Quarterly earnings transfers from Undivided Earnings to the Regular
Reserve are mandated by implementing NCUA Rules and Regulations.
Beginning with the effective date of classification as "adequately
capitalized" or lower, a federally-insured credit union must transfer an
amount equivalent to at least 1/10^th^ percent (0.1%) of its total
assets for the current quarter (or more by choice) from Undivided
Earnings to its Regular Reserve account until it is "well-capitalized".

## Entries in the Journal and Cash Record

All increases and decreases to the Regular Reserve are credited and
debited as \"Miscellaneous\".

*The Regular Reserve account should be increased (credited):*

a.  At the end of the accounting period with the amount of Undivided
    Earnings required to be transferred to the Regular Reserve (i.e., an
    amount equivalent to 1/10^th^ percent of total assets until the
    credit union's net worth classification category reaches "well
    capitalized".)

*The Regular Reserve account should be decreased (debited) with:*

a.  Other losses provided that either the charge will not cause the
    credit union's net worth classification to fall below "well
    capitalized" or the charge has been previously approved in writing
    by the appropriate Regional Director, or if state-chartered, the
    appropriate state official.

    A transfer of funds to "Undivided Earnings" to pay dividends if the
    credit union has depleted its "Undivided Earnings", provided that
    either the charge will not cause the credit union's net worth
    classification to fall below "well capitalized" or the charge has
    been previously approved in writing by the appropriate Regional
    Director, or if state-chartered, the appropriate state official.

## Posting to the General Ledger

All debit and credit entries are posted from \"Miscellaneous\" in the
Journal and Cash Record to the General Ledger. All entries must be
explained in the \"Explanatory Remarks\" section of the General Ledger.

######## Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

At the close of the accounting period:

a)  To transfer the required amount of earnings to the Regular Reserve:

+----------------------------------------+---------------+---+---------+
| Dr.-Undivided Earnings                 | \$800         |   |         |
+----------------------------------------+---------------+---+---------+
| > Cr.-Regular Reserve                  |               | \ |         |
|                                        |               | $ |         |
|                                        |               | 8 |         |
|                                        |               | 0 |         |
|                                        |               | 0 |         |
+----------------------------------------+---------------+---+---------+

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

## Detailed Transactions

Credit:

At the end of the accounting period:

a)  With amount of earnings transfer required by statute and rule as
    amended; offsetting debit to \"Undivided Earnings."

Debit:

At the end of the accounting period:

a.  With amount of other losses provided that either the charge will not
    cause the credit union's net worth classification to fall below
    "well capitalized" or the charge has been previously approved in
    writing by the appropriate Regional Director, or if State-Chartered,
    the appropriate state official; offsetting credit to "Undivided
    Earnings".

    With the amount necessary to pay dividends if the credit union has
    depleted its "Undivided Earnings", provided that either the charge
    will not cause the credit union's net worth classification to fall
    below "well capitalized" or the charge has been previously approved
    in writing by the appropriate Regional Director, or if
    State-Chartered, the appropriate state official; offsetting credit
    to "Undivided Earnings".

####### Special Reserve

Each federally-insured credit union shall establish and maintain such
reserves as may be required by the Federal Credit Union Act, by state
law, by regulation, or in special cases by the NCUA Board or appropriate
State official. Specific accounting instructions pertaining to this
account are furnished by the National Credit Union Administration when
the "Special Reserve" is ordered. This account should not be used unless
ordered or authorized by the National Credit Union Administration.

## Entries in the Journal and Cash Record

All entries affecting this account should be recorded in the
\"Miscellaneous\" columns of the Journal and Cash Record.

######## UNDIVIDED EARNINGS

This account is used to show the balance of the accumulated earnings of
the credit union for prior periods and the earnings of the period just
closed which are available for dividends.

The Undivided Earnings account should be increased (credited) with:

a.  The net earnings transferred at the end of each accounting period
    from the \"Net Income (Loss)" account.

    The amount transferred from \"Special Reserve for Losses\", when
    this reserve is reduced or eliminated.

    The amount transferred from \"Reserve for Loss Contingencies\", when
    this reserve is reduced or eliminated.

    The amount transferred from \"Appropriated Undivided Earnings\",
    when this account is reduced or eliminated.

    The determined conversion amount for accrued income when converting
    to the Accrual Basis of Accounting (the debit side of this entry is
    to the accrued income account series.)

The Undivided Earnings account should be reduced (debited) with:

a.  The amount of the net loss transferred at the end of the accounting
    period from the \"Net Income (Loss)\" account.

    At the end of each accounting period, the required earnings transfer
    to the \"Regular Reserve\".

    The amount transferred to any Special Reserve for Losses which may
    be required by the NCUA Board.

    The amount transferred to \"Reserve for Losses Contingencies".

    The determined conversion amount for accrued expenses when
    converting to the Accrual Basis of Accounting (the credit side of
    this entry is to the accrued expenses account series).

    The amount transferred to \"Appropriated Undivided Earnings".

Expenses incurred or paid should not be charged directly to the
Undivided Earnings account but must be charged to the appropriate
expense accounts during the period they are incurred or paid. Likewise,
income should not be credited directly to this account but credited to
the appropriate income accounts. Bonuses to employees are not to be
charged to this account but are to be considered as expenses. Dividends
are also considered as expenses and charged to \"Dividends Expense\".
Interest refunds are considered as reductions of income and credited to
\"Interest Refunds".

## 

## Entries in the Journal and Cash Record

All of the debit and credit entries to this account should be entered as
\"Miscellaneous\" in the Journal and Cash Record.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a.  To close period net income into Undivided Earnings:

+------------------------------------------+-----+--------------------+
| Dr.-Net Income                           | \   |                    |
|                                          | $5, |                    |
|                                          | 000 |                    |
+------------------------------------------+-----+--------------------+
| > Cr.- Undivided Earnings                |     | \$5,000            |
+------------------------------------------+-----+--------------------+

a.  To establish an appropriation of Undivided Earnings for a
    board-established purpose:

+------------------------------------------+-----+--------------------+
| Dr.-Undivided Earnings                   | \   |                    |
|                                          | $2, |                    |
|                                          | 000 |                    |
+------------------------------------------+-----+--------------------+
| > Cr.- Appropriation for Building Fund   |     | \$2,000            |
+------------------------------------------+-----+--------------------+

######## Detailed Transactions

Credit:

a)  At the end of the accounting period, with the net earnings
    transferred from \"Net Income (Loss)\".

b)  With transfers to reduce or eliminate the \"Special Reserve for
    Losses\" when authorized by the National Credit Union Administration
    Board.

c)  With transfers from the \"Reserve for Loss Contingencies\" or other
    reserves when authorized by the board of directors.

d)  With the determined conversion amount for accrued income when
    converting to the Accrual Basis of Accounting immediately following
    the closing of the books at the end of the dividend period.

Debit:

a)  At the end of the accounting period with net loss for the period
    transferred from \"Net Income (Loss)\".

b)  With the required earnings transfer to the Regular Reserve for the
    accounting period.

c)  With transfers to establish or increase the \"Reserve for Loss
    Contingencies\" (or other reserves) when authorized by the board of
    directors.

d)  With the determined conversion amount for Accrued Expense when
    converting to the Accrual Basis of Accounting immediately following
    the closing of the books at the end of the dividend period.

####### Appropriated Undivided Earnings

This account may be established by any credit union, with the approval
of the board of directors, for planned expenditures or liabilities, not
otherwise shown on the credit union\'s records. This account should
represent a further allocation of Undivided Earnings. It should be
included in the equity section of the Statement of Financial Condition.
Even though an Appropriated Undivided Earnings account has been
established for a particular liability or expenditure, such as future
dividend costs, relocation costs for moving to a new building or costs
incurred for parking lot resurfacings, etc., expenditures of this nature
should not be charged directly to this account. Rather, they should be
charged to their respective expense accounts and included in the
\"Operating Expenses (Control)\", or the respective General Ledger
expense account balance total that is closed to \"Undivided Earnings\".
Past earnings should be transferred from \"Appropriated Undivided
Earnings" to \"Undivided Earnings" in amounts equal to the appropriated
cost charged to the current period expenses during the accounting
period. This will eliminate any reduction in Undivided Earnings that
would have resulted from the charge to expenses.

## Entries in the Journal and Cash Record

All of the debit and credit entries to this account should be entered as
\"Miscellaneous\" in the Journal and Cash Record.

***Posting to the General Ledger***

Entries to this account in the General Ledger should be posted
individually as \"Miscellaneous\" in the Journal and Cash Record.

## Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To establish, or increase the balance of, the Appropriated Undivided
    Earnings account when determined necessary by the board of
    directors:

+------------------------------------------+-----+--------------------+
| Dr.-Undivided Earnings                   | \   |                    |
|                                          | $5, |                    |
|                                          | 000 |                    |
+------------------------------------------+-----+--------------------+
| > Cr.-Appropriated Undivided             |     | \$5,000            |
| >                                        |     |                    |
| > Earnings                               |     |                    |
+------------------------------------------+-----+--------------------+

b)  To eliminate, or decrease balance of the Appropriated Undivided
    Earnings when determined to be necessary by the board of directors
    or to reimburse Undivided Earnings for planned expenditures or an
    incurred liability.

+------------------------------------------+-----+--------------------+
| Dr.-Appropriated Undivided               | \   |                    |
|                                          | $2, |                    |
| Earnings                                 | 500 |                    |
+------------------------------------------+-----+--------------------+
| > Cr.-Undivided Earnings                 |     | \$2,500            |
+------------------------------------------+-----+--------------------+

######## Detailed Transactions

Credit:

a)  As authorized by the board of directors with amounts to be
    established, for a specific expenditure or liability, as
    Appropriated Undivided Earnings and with authorized increases in
    this account.

Debit:

a)  As authorized by the board of directors with amounts of expenditures
    incurred that were included in operating expenses and resulted in a
    further reduction of the Appropriated Undivided Earnings Account.

**Reserve for Loss Contingencies**

The board of directors has the power, after the required Regular Reserve
transfer requirements have been set aside, to provide for probable
losses by establishing a \"Reserve for Loss Contingencies". A Reserve
For Loss Contingencies may only be established when it is probable that
an asset has been impaired or a liability has been incurred at the date
of the financial statements, future events will confirm the existence of
the loss, and the loss can be reasonably estimated. Contingent losses
not otherwise shown on the credit union\'s records should be recorded
for amounts equal to those portions of the probable loss. Since the
approximate date of the loss will probably be known, the expense may be
accrued prior to the payment of the loss. This is accomplished by
debiting the appropriate current period expense account and crediting a
liability account \"Accrued Loss Contingencies" for an equivalent
amount. At the same time, Undivided Earnings can be debited for a like
amount and the Reserve for Loss Contingencies appropriation established.

The amount of the liability accrual will need to be adequate enough to
allow the accrued liability account to equal the amount of the estimated
loss at the time payment is expected to be made. Losses should not be
charged directly against the \"Reserve for Loss Contingencies\". After
the loss has been paid and charged against the accrued liability
account, the designated Reserve for Loss Contingencies balance should be
eliminated and \"Undivided Earnings" credited for a like amount at the
end of the dividend period.

This account should also be used in cases where the deductible on the
federal credit union\'s fidelity bond exceeds 10 percent of the federal
credit union\'s Regular Reserve account.

This account should only be increased with amounts necessary to maintain
the difference between the deductible and 10 percent of the Regular
Reserve Account. The amount of such excess should be credited to this
account with an offsetting debit to \"Undivided Earnings\". The account
should be eliminated when the deductible becomes less than or equal to
10 percent of federal credit union\'s Regular Reserve account. This is
accomplished by debiting this account and crediting \"Undivided
Earnings\".

## Entries in the Journal and Cash Record

All entries affecting this account should be recorded as
\"Miscellaneous\" in the Journal and Cash Record.

## Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To establish, or increase the balance of, a Reserve for Loss
    Contingencies when determined necessary by the board of directors:

+-----------------------------------------+-------+--------------------+
| Dr.-Undivided Earnings                  | \$    |                    |
|                                         | 5,000 |                    |
+-----------------------------------------+-------+--------------------+
| > Cr.-Reserve for Loss                  |       | \$5,000            |
| >                                       |       |                    |
| > Contingencies                         |       |                    |
+-----------------------------------------+-------+--------------------+

a.  To decrease or eliminate the amount of the Reserve for Loss
    Contingencies when determined necessary by the board of directors:

+----------------------------------------+-----------+-------+---------+
| Dr.-Reserve for Loss                   | \$2,000   |       |         |
|                                        |           |       |         |
| Contingencies                          |           |       |         |
+----------------------------------------+-----------+-------+---------+
| > Cr.-Undivided Earnings               |           | \$    |         |
|                                        |           | 2,000 |         |
+----------------------------------------+-----------+-------+---------+

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

#### **Detailed Transactions**

Credit:

a)  As authorized by the board of directors with amounts to be
    established as a Reserve for Loss Contingencies and with authorized
    increases in this reserve.

Debit:

a)  As authorized by the Board of Directors with amounts to decrease the
    Reserve for Loss Contingencies.

######## Reserve for Nonconforming Investments

####### Federally-insured state chartered credit unions are required under terms of the insurance agreement to establish an investment valuation reserve for non-conforming investments which are otherwise accounted for at historical cost (e.g., non-conforming held-to-maturity securities). Nonconforming investments are those investments permissible under state law for a state chartered credit union, but which are impermissible for federally chartered credit unions. Refer to Part 741.3(a)(3) of the NCUA Rules and Regulations for further explanation. Refer to "Reserve for Loss Contingencies" above for similar illustrative accounting entries and detailed transactions.

####### *ACCUMULATED UNREALIZED GAINS/ LOSSES ON AVAILABLE-FOR-SALE SECURITIES*

This account, an item of Other Comprehensive Income, is used to record
unrealized gains/losses on available-for-sale (AFS) securities. When
available-for-sale securities are written to fair value, an entry is
made directly to the investment account with the corresponding
debit/credit to this account. This account is a separate component of
equity; separate from the regular reserve or undivided earnings.
Nonetheless, this separate equity account should be netted against
accumulated current and undivided earnings *when assessing a credit
union's ability to pay dividends*.

Upon disposition of the related security, the portion of this account
that relates to the security disposed of is reversed with the gain or
loss on disposition of the security recorded through the income
statement as a Gain or Loss on Disposition of Investments. Refer to
"Investments" in Section 300 of this manual for further explanation and
illustrative entries.

######## DONATED EQUITY

This account is used by credit unions under \$10 million in assets that
wish to account for the receipt of donated fixed assets under a
regulatory accounting practice (RAP). Generally accepted accounting
principles (GAAP) require such donations to be recorded as income when
received. Credit unions following GAAP should record all contributions
received/made in income/expense when received/made. Contributions
include many of the donations credit unions receive such as office
space, utilities, auditing service, etc.

Under this RAP, when a credit union receives as a gift or donation a
tangible fixed asset of material value, the value of such asset should
be established by a credit to this account as a separate classification
of the credit union\'s equity. The offsetting debit should be to the
appropriate asset account(s) for tangible fixed assets: e.g., furniture
and equipment, building, etc.

Donated fixed assets should be recorded in the accounts based on the
estimated fair market value of the assets at the date of acquisition.
Depreciation of donated fixed assets should be charged to expense in
each accounting period over the useful lives of the assets in the same
manner as for other fixed assets.

When fixed assets donated to a credit union are not considered of a
\"material\" value, the value of the assets debited to the appropriate
fixed asset account(s) should be credited to \"Other Non-operating
Income (Expense)\".

[Note]{.underline}: Contributions of cash or reimbursement of services
or other expenses (e.g., office space, utilities, supplies, etc.) that
are not tangible fixed assets, should be credited to "Other
Non-Operating Income" with the offsetting debit to cash or the
appropriate expense account. Refer to "Other Non-Operating Income" in
Section 600 of this manual for further explanation.

Entries are illustrated below.

Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a.  When a donated fixed asset of material value is received by the
    credit union:

+------------------------------------------+-----+--------------------+
| Dr.-Furniture and Equipment              | \   |                    |
|                                          | $2, |                    |
|                                          | 400 |                    |
+------------------------------------------+-----+--------------------+
| > Cr.-Donated Equity                     |     | \$2,400            |
+------------------------------------------+-----+--------------------+

b)  When the sponsor contributes for payment of utilities on the credit
    unions behalf:

+------------------------------------------+----------+----------------+
| Dr.-Utilities Expense                    | \$500    |                |
+------------------------------------------+----------+----------------+
| > Cr.-Other Miscellaneous                |          | \$500          |
| >                                        |          |                |
| > Operating Income                       |          |                |
+------------------------------------------+----------+----------------+

c)  When depreciation is recorded:

+------------------------------------------+----------+----------------+
| Dr.-Depreciation of                      | \$120    |                |
|                                          |          |                |
| Furniture & Equipment                    |          |                |
+------------------------------------------+----------+----------------+
| > Cr.-Allowance for Depreciation of      |          | \$120          |
| >                                        |          |                |
| > Furniture and Equipment                |          |                |
+------------------------------------------+----------+----------------+

+------------------------------------------+----------+----------------+
| Dr.-Donated Equity                       | \$120    |                |
+------------------------------------------+----------+----------------+
| > Cr.-Miscellaneous Income               |          | \$120          |
+------------------------------------------+----------+----------------+

d)  If donated equipment is disposed of by sale: assume a donated asset
    valued at \$2,400 with an accumulated allowance for depreciation of
    \$900 is sold for cash of \$1,600. The entry is:

+------------------------------------------+----------+----------------+
| Dr.-Donated Equity                       | 1,500    |                |
+------------------------------------------+----------+----------------+
| Dr.-Cash                                 | \$1,600  |                |
+------------------------------------------+----------+----------------+
| Dr.-Allowance for Deprecia-              | 900      |                |
|                                          |          |                |
| tion of Furniture and                    |          |                |
|                                          |          |                |
| Equipment                                |          |                |
+------------------------------------------+----------+----------------+
| > Cr.-Furniture and Equipment            |          | \$2,400        |
+------------------------------------------+----------+----------------+
| > Cr.-Gain (Loss) on disposition of      |          | 100            |
| >                                        |          |                |
| > Assets                                 |          |                |
+------------------------------------------+----------+----------------+
| > Cr.-Miscellaneous Income               |          | 1,500          |
+------------------------------------------+----------+----------------+

***NET INCOME (LOSS)***

This account is used to accumulate the various income and expense
accounts into a single account to determine the net income or loss for
the accounting period and to transfer the net income or loss to
\"Undivided Earnings".

This account is credited with:

a)  The credit balances of all operating income, operating expense, and
    non-operating income (expense) accounts when the books are closed;
    offsetting debits should be to the individual General Ledger income
    and expense accounts showing credit balances.

This account is debited with:

a)  The debit balances of all operating expense, income and
    non-operating income (expense) accounts when the books are closed;
    offsetting credits should be to the individual General Ledger income
    and expense accounts showing a debit balance.

b)  The balance of this account, if a credit, after all income and
    expense accounts are closed; offsetting credit should be to
    \"Undivided Earnings".

## Entries in the Journal and Cash Record

All entries affecting this account should be entered as
\"Miscellaneous\" in the Journal and Cash Record.

## Posting to the General Ledger

Entries to this account are posted individually from the
\"Miscellaneous\" grouping in the Journal and Cash Record to the General
Ledger. The \"Explanatory Remarks\" related to this account in the
General Ledger should be used to indicate the nature of amounts closed
into or transferred from this account.

## Illustrative Entries

  -----------------------------------------------------------------------

  -----------------------------------------------------------------------

a)  To close the income and non-operating gain accounts with credit
    balances:

+------------------------------------------+-------------+---+------------+
| Dr.-Interest on Loans                    | \$6,000     |   |            |
+------------------------------------------+-------------+---+------------+
| Dr.-Income from Other Investments        | 2,000       |   |            |
+------------------------------------------+-------------+---+------------+
| Dr.-Fees and Charges                     | 65          |   |            |
+------------------------------------------+-------------+---+------------+
| Dr.-Gain (Loss) on Investments           | 100         |   |            |
+------------------------------------------+-------------+---+------------+
| > Cr.-Net Income (Loss)                  |             |   | \$8,165    |
+------------------------------------------+-------------+---+------------+

b)  To close the operating expenses and income accounts with debit
    balances:

+------------------------------------------+-------------+---+-----------+
| Dr.-Net Income (Loss)                    | \$6,920     |   |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-Interest Refunds                   |             | \ |           |
|                                          |             | $ |           |
|                                          |             | 1 |           |
|                                          |             | , |           |
|                                          |             | 8 |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-Rent                               |             | 1 |           |
|                                          |             | , |           |
|                                          |             | 2 |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-Communications                     |             | 1 |           |
|                                          |             | 2 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-Provision for Loan Losses          |             | 6 |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-NCUA Operating Fee                 |             | 2 |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+
| > Cr.-Dividends                          |             | 3 |           |
|                                          |             | , |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
|                                          |             | 0 |           |
+------------------------------------------+-------------+---+-----------+

c)  To transfer net income for the period to Undivided Earnings:

+------------------------------------------+-------------+---+------------+
| Dr.-Net Income (Loss)                    | \$1,245     |   |            |
+------------------------------------------+-------------+---+------------+
| > Cr.-Undivided Earnings                 |             |   | \$1,245    |
+------------------------------------------+-------------+---+------------+

## Detailed Transactions

Credit:

a)  When books are closed with the sum of the credit balances of all
    operating and non-operating income (expense) and operating expense
    accounts.

b)  With balance of the account, if a debit, after all income and
    expense accounts have been closed; transfer to Undivided Earnings.

Debit:

a)  When books are closed with the sum of the debit balances of all
    operating and non-operating expense and income accounts.

b)  With balance of the account, if a credit, after all income and
    expense accounts have been closed; transfer to Undivided Earnings.