AFT04205 : ELEMENTS OF BANKING

CHAPTER TWO: INTRODUCTION TO BANKING BUSINESS

The Institute of Accountancy Arusha (IAA)

Department of Accounting and Finance

 BANK ACCOUNTS
 A bank account is a financial account between
a bank customer and a financial institution.
 The financial transactions which have
occurred within a given period of time on a
bank account are reported to the customer on
a bank statement and the balance of the
account at any point in time is the financial
position of the customer with the institution.
(ALL TRANSACTIONS THAT ARE DONE WITH THE CUSTOMER ARE AT A
GIVEN PERIOD OF TIME ARE REPORTED IN THE BANK STATEMENT AND
THE BALANCE OF AN ACCOUNT IS FINANCIALPOSITION OF THE
CUSTOMER IN THE BANK)
 BANK ACCOUNTS
 Bank accounts may have a positive, or credit balance,
where the bank owes money to the customer; or a
negative, or debit balance, where the customer owes
the bank money.(Positive/credit when the bank lends
money from the customer and negative/debit balance
when the customer have take loan from the bank)
 The most important and primary function of bank is
to accept deposits.
 When banks mobilize savings, they do it in the form
of deposits, which are the money accepted by banks
from customers to be held under stipulated terms
and conditions.
 BANK ACCOUNTS
 Deposits are thus an instrument of savings.
The money deposited in the bank is the
money of the people.
 People do earnings and after spending some

part of it, they tend to save remaining part of

it for future contingencies and requirements.
 Saved money at home cannot give returns

and a fear of theft always be there.

 Types of bank accounts
 Bank Deposits serve different purposes for
different customers.
 Some customer wants to save lump sum

amount for longer duration while some want

to save for short time period.
 Some keep deposits for safety purposes while

some deposits to take benefit of interest

rates.
 Types of bank accounts
 Customers deposit their savings for safety
and earning interest.
 A bank provides facilities to open various

types of accounts keeping in mind the needs

of its customers.
 Types of bank accounts
 Generally, the bank accounts are classified
into three categories:
 (a) the current accounts, (b) the fixed deposit

accounts, and (c) the saving deposit accounts.

 In recent years, a few new types of accounts

have also been introduced by banks.

Prominent among them are, the recurring
deposit accounts, student’s deposit accounts.
 Savings Bank Account
 A Savings Account is
a type of account designed to simply hold money that is no
t needed soon. (is the type of a bank account where by the
customer saves money for future use or future purpose)
 These accounts are opened by the persons who want to
save some part of their income either to earn interest on
deposit or for safety purposes.
 Savings deposit account is meant for small businessmen
and individuals who wish to save a little out of their current
incomes to safeguard their future and also to earn some
interest on their savings. (it is normally used by individuals
and businessmen who wants to save a small amount of
their earnings to earn income or for safe keeping)
 Savings Bank Account
 Money can be deposited in this account at any time
during the working hours.( type of bank account
which allows customers to deposit fund in a short
term and earns moderate interest rate)
 Withdrawals can also be made easily by various
modes.
 However bank puts some restriction on the
number of withdrawals from this account. Interest
rates paid on deposits vary from bank to bank.
 This account is very easy to access as we can easily
transact with bank.
 Characteristics of Savings Account
 1. The main objective of saving account is to
promote savings.
 2. There is no restriction on the number and

amount of deposits.
 3. Withdrawals are allowed subject to certain

restrictions.
 4. The money can be withdrawn either by

cheque or withdrawal slip.

 Characteristics of Savings Account
 5. The rate of interest payable is very small
(sometimes no interest) on saving accounts.
 6. Saving account is of continuing nature.

There is no maximum period.

 7. A minimum amount has to be kept on

saving account.
 8. No loan facility is provided against saving

account.
Advantages of Savings Account
 Saving account encourages savings habit
among salary earners and others who have
fixed income.
 It enables the depositors to earn income by

way of interest
 It helps the depositor to make payment by

way of cheque.
 The bank offers number of services to the

saving bank account holders.

 Fixed Deposit Account
 The term ‘fixed deposit’ means that the
deposit is fixed and is repayable only after a
specific period is over. (is the type of bank
account where by the customer can open an
account in a fixed period of time at fixed
interest rate)
 As the name says, the amount deposited is for
fixed period say one, two, three or may be for
years.
 Because of this nature, it is also called Term
Deposit.
 Fixed Deposit Account
 Amount deposited is payable back after its
maturity or at the expiry of the period with
interest.
 Interest payable on FD is little higher as

compared to Savings Account because the

money deposited in savings accounts can be
withdrawn at anytime up to the limit of
amount available in the account.
 Fixed Deposit Account
 Amount deposited in FD account is free for
use by the banks as it is non withdrawable
money.
 After the date of maturity it is compulsory

that either the amount should be withdrawn

or the account has to be renewed by the
customer because in the absence of these
two condition banks are not liable to pay
interest on such deposits after the date of
maturity.
 Characteristics of Fixed Deposit
Account
 1. The main purpose of fixed deposit account is to
enable the individuals to earn a higher rate of interest
on their surplus funds, extra money(it enable
individuals to earn higher interest rate on the surplus
funds )
 2. The amount can be deposited only once. For further
such deposits, separate accounts need to be opened.
 3. The period of fixed deposits ranges between 15 days
to 10 years.
 4. A high interest rate is paid on fixed deposits. The
rate of interest may vary as per amount, period and
from bank to bank.
Characteristics of Fixed Deposit Account
 5. Withdrawals are not allowed.
 However, in case of emergency, banks

allow to close the fixed account prior to

maturity date. In such cases, the bank
deducts a certain percentage from the
interest payable as on that date.
 6. The depositor is given a fixed deposit

receipt, which depositor has to produce

at the time of maturity.
 The deposit can be renewed for a further

period.
 Characteristics of Fixed Deposit
Account
 7. Suitability:
 Fixed deposits are usually chosen by people

who have surplus money and do not require

it for some time.
 These deposit accounts are also favored by

the bankers because fixed deposit funds can

be utilized by them freely till the due date of
the repayment.

 Characteristics of Fixed Deposit
Account
 8. Restrictions on Withdrawals: Withdrawal of
interest or the principal amount through
cheques is not permitted.
 The depositor is not given a cheque book.
 At the request of the customer, the banker

may credit the amount of interest or the

principal to his saving or current account
from which he may withdraw the same
through cheques.
 Advantages of Fixed Deposit
Account
 1. Fixed deposit encourages savings habit for
a longer period of time..
 2. Fixed deposit account enables the
depositor to earn a high interest rate.
 The rate of interest on fixed deposits is paid

on given rate of interest after the date of

maturity but if customer requests, quarterly
interest can also be paid.
 3. The depositor can get loan facility from the

bank.
 Advantages of Fixed Deposit
Account
 4. On maturity the amount can be used to
make purchases of assets.
 5. The bank can get the funds for a longer

period of time.
 6. The bank can lend such funds for short

term loans to businessmen.

 7. Fixed deposits indirectly boost economic

development of the country.

 Advantages of Fixed Deposit
Account
 8. The bank can also invest such funds in
profitable areas.
 9. This account can be opened joint account

also.
 Current Account
 This account is opened by businessmen and
traders. Businessmen have to transact many
times in a day with their customers.
 Facilitating them with the facility of Current

account, bank allows traders to withdraw

them as many times they require
withdrawing.
 This account may also be operated upon any

number of times during a working day.

 Current Account
 This account never becomes time barred,
because no interest is paid for credit balance
in this account.
 Customers are generally given paper checks to
carry out day-to-day transactions, like paying
bills, making purchases, or transferring money
to another account.
 Because of this frequency, bank cannot use
their money and pays no interest on deposits.
 Holder of this account are also facilitate with
Overdraft Facility.
 Features of Current Account
 1. The main objective of current bank account
is to enable the businessmen to conduct their
business transactions smoothly.
 2. There is no restriction on the number and
amount of deposits. There is also no
restriction on the withdrawals.
 3. Generally banks do not pay any interest on
current account. Nowadays, some banks do
pay interest on current accounts.
 4. Current account is of continuing nature and
as such there is no fixed period.
Advantages of Current Account
 1. Current account enables businessmen to
conduct his business transactions smoothly.
 2. The businessmen can withdraw any amount
at any time from their current accounts.
 There are also no restrictions on withdrawals.
 3. The businessmen can make direct payment
to their creditors with the help of cheque.
 4. The bank collects money on behalf of its
customers and credits the same to their
accounts.
Advantages of Current Account
 5. Current account enables the account
holder to obtain overdraft facility.
 6. The creditors of the account holder can get

credit-worthiness information of the account

holder through interbank connection.
 7. Current account facilitates the industrial

progress of the country.

 Without the help of this account ,
businessmen would have f aced a number of
difficulties in running their business.
 Advantages of Current Accounts
 (a) Demand deposits are treated at par with
cash.
 They constitute cheque currency.
 Cheques are readily accepted in business for

making and receiving payments.

 (b) Businessmen have to receive and make a

large number of payments every day.

 It is difficult to handle cash.
 The cheque facility removes the difficulty.
 Advantages of Current Accounts
 (c) There are no restrictions on the number of
cheques or on the amount to be drawn at a
time by one cheque.
 (d) Overdraft facilities are allowed by the

banks to the current account holders

 Recurring Deposit Account
 This type of account is suitable for those who
expect to earn a fair return on deposit. In
this, customer has to agree to deposit fixed
installments on monthly basis for a fixed
period.
 After the maturity of the fixed period
customer gets his deposit along with interest.
 Recurring Deposit Account
 It is also called ‘Cumulative Account’ because
its deposit mode is on monthly basis.
 Customers are allowed to close the account in

between if he desires to do so.

 This account can be opened by individual and

jointly.
 Recurring deposit account is generally
opened for a purpose to be served at a future
date.
 Features of RD Account
 1. The main objective of recurring deposit
account is to develop regular savings habit
among the public.
 2. The period of deposit is minimum six

months and maximum ten years. When

duration of deposit is less than three months,
no interest is paid by banks.
 3. The rate of interest is higher.
 Features of RD Account
 4. No withdrawal is allowed. However, the
bank may allow closing the account before
the maturity period.
 5. The bank provides the loan facility. The

loan can be given up to 75% of the amount

standing to the credit of the account holder.
Advantages of RD Account
 Recurring deposit encourages regular savings
habit among the people.
 Recurring deposit account holder can get a

loan facility.
 The bank can utilize such funds for lending

to businessmen
 The bank may also invest such funds in

profitable areas
Difference between Savings Bank Account &
Current Bank Accounts
SAVING BANK CURRENT BANK
BASIS
ACCOUNT ACCOUNT
Preferred by
Preferred by individuals
PREFERENCE businessman for daily
for interest
transaction

OVERDRAFT Overdraft not allowed Overdraft allowed

Interest is payable on
No interest is payable
INTEREST minimal monthly
on deposit
balance deposit
Minimum balance
MINIMUM BALANCE No minimum balance
requirement
Unlimited number of
ACCESSIBILITY Limited Transaction transactions on your
account.
Difference between Fixed Deposit Account and
Recurring Deposit Account
BASIS Fixed Deposit Account Recurring Deposit Account

PREFERENCE Suitable for someone, Suitable for those who have

who has some lump-sum regular income every month
amount to invest (say a salaried individual)
and want to save a certain
fixed amount for a specific
time interval.
DEPPOSIT Deposited once at the Invested in bank on monthly
time of basis for a fixed rate of return.
opening account
WITHDRAWL Premature and partial Partial withdrawal is not
FACILITY withdrawal facilities are allowed nor can we pay more
available, but not without than the decided amount.
some penalty, that one
has to pay at the time of
withdrawal.