Deposit account
 | The examples and perspective in this articlemay not represent aworldwide viewof the subject.(April 2016) |
| Part of a series onfinancial services |
| Banking |
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Adeposit accountis abank accountmaintained by afinancial institutionin which a customer can deposit and withdrawmoney.Deposit accounts can besavings accounts,current accountsor any of several other types of accounts explained below.
Transactions on deposit accounts are recorded in a bank's books, and the resulting balance is recorded as aliabilityof the bank and represents an amount owed by the bank to the customer. In other words, the banker-customer (depositor) relationship is one of debtor-creditor. Some banks charge fees for transactions on a customer's account. Additionally, some banks pay customersintereston their account balances.
Types of accounts[edit]
| SN | Account Type | Description of account functionality |
|---|---|---|
| 1 | Transactional accounts | Also known as "current accounts" inCommonwealth countriesand "checking accounts" in theUnited States.
A deposit account for the purpose of securely and quickly providing frequent access to funds on demand, through various different channels. Because money is available on demand, these accounts are also referred to as "demand accounts" or "demand depositaccounts ", except in the case ofNOW (negotiable order of withdrawal) accounts,which are rare checking accounts that require a seven-day notice before withdrawals. |
| 2 | Money market account | A deposit account that pays interest atmoney marketrates, and for which no notice or very short notice is required for withdrawals. In the United States, they are similar to checking accounts in that they offer check-writing privileges and instant access but they are subject to the same regulations as savings accounts, including monthly transaction limits. |
| 3 | Savings account | Accounts maintained by retail banks that payinterestbut can not be used directly as money (for example, by writing a cheque or using a debit card at a point of sale), although cash can be withdrawn from these accounts at an automated teller machine. While they are not as convenient to use as checking accounts, these accounts generally offer consumers a higher rate of interest than a transactional account and will usually be linked to a transactional account. |
| 4 | Time deposit | Also known as acertificate of depositin the United States.
A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time and will incur penalties for withdrawals before a certain date. When the term is over it can be withdrawn or it can be rolled over for another term. Generally speaking, the longer the term the higher the interest rate offered by the bank. |
| 5 | Call deposit | A deposit account that allows for the withdrawal of funds without penalty but requires a higher minimum balance to earn interest.[1] |
| 6 | Sweep account | A deposit account in which amounts over a certain balance are automatically transferred to another account pursuant to a pre-determined set of arrangements. |
| 7 | Automatic transfer service account | A deposit account that allows the transfer of funds from asavings accountto achecking accountin order to cover a check written or to maintain a minimum balance. |
| 8 | Short term deposit account | An account where deposits are held for no longer than a year.[2] |
How banking works[edit]
In banking, the verbs "deposit" and "withdraw" mean a customer paying money into, and taking money out of, an account, respectively. From a legal and financial accounting standpoint, the noun "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds that the bank holds as a result of the deposit, which are shown asassetsof the bank.
Subject to restrictions imposed by the terms and conditions of the account, the account holder (customer) retains the right to have the deposited money repaid on demand. The terms and conditions may specify the methods by which a customer may move money into or out of the account, e.g., bycheque,internet banking,EFTPOSor other channels.
For example, a depositor depositing $100 in cash into a checking account at a bank in the United States surrenders legal title to the $100 in cash, which becomes an asset of the bank.[citation needed]On the bank's books, the bank debits its cash account for the $100 in cash, and credits a "deposits" liability account for an equal amount. (Seedouble-entry bookkeeping system.)
In the financial statements of the bank, the $100 in currency would be shown on the balance sheet as an asset of the bank and the deposit account would be shown as a liability owed by the bank to its customer. The bank's financial statement reflects the economic substance of the transaction, which is that the bank has borrowed $100 from its customer and has contractually obliged itself to repay the customer according to the terms of the agreement. These "physical" reserve funds may be held as deposits at the relevant central bank and will receive interest as permonetary policy.
Typically, a bank will not hold the entire sum in reserve, but will lend most of the money to other clients, in a process known asfractional-reserve banking.This allows providers to earn interest on the asset and hence to pay interest on deposits.
By transferring the ownership of deposits from one party to another, banks can avoid using physical cash as a method of payment. Commercial bank deposits account for most of themoney supplyin use today. For example, if a bank in the United States makes a loan to a customer by depositing the loan proceeds in that customer's checking account, the bank typically records this event by debiting an asset account on the bank's books (called loans receivable or some similar name) and credits the deposit liability or checking account of the customer on the bank's books. From an economic standpoint, the bank has essentially created economic money (although notlegal tender). The customer's checking account balance has no banknotes in it, as a demand deposit account is simply a liability owed by the bank to its customer. In this way, commercial banks are allowed to increase the money supply (without printing currency).
Regulations[edit]
Banking operates under an intricate system of customs and conventions developed over many centuries. It is also normally subject to statutory regulations, such asreserve requirementsdeveloped to reduce the risk of failure of the bank. It may also have the purpose of reducing the extent of depositor losses in the event of bank failure.
To reduce the risk to depositors of a bank failure, some bank deposits may also be secured by adeposit insurancescheme, or be protected by agovernment guaranteescheme.
See also[edit]
References[edit]
- ^"Call Deposit".Financial Advisory.Retrieved2012-05-14.
- ^Short Term Deposit,International Deposit, Interest Rates Exchange. Accessed 2012-05-14.
