Chapter 9

Checking Accounts

Purpose of a Checking Account

A check is a written order to a bank to pay the stated amount to the person named on it.

A checking account is commonly called a demand deposit, because money can be withdrawn at any time.

The Check Process You write the check to the payee. The payee cashes your check. The bank that cashed your check returns it to

your bank. To reimburse the payment, your bank

withdraws the money from your account and sends it to the other bank.

Your bank then stamps the back of your check, indicating that it has cleared

A canceled check bears the bank’s stamp, indicating that it has cleared.

Advantages of a Checking Account A convenient way to pay your bills Writing a check is safer than paying

with cash Has a built-in record keeping system You will have access to other bank

services You may be able to use a check card

instead of writing checks

Responsibilities of a Checking Account You must write checks carefully

and keep good records You must verify the accuracy of

your bank statement each month You must keep canceled checks

amount your records You must maintain sufficient

funds in your account at all times

Overdrafts An overdraft is a check written for

more money than your account contains

This is referred to as a “bounced” check.

Floating a check is realizing that the account contains insufficient funds, but writing a check anyway, hoping that a deposit will clear before the check is cashed.

Reconciliation The process of matching your

checkbook register with the bank statement (balancing your checkbook)

Why might your bank statement not match your register? May have written a check or made a deposit since

the bank created the statement May have fees or charges imposed by the bank May have earned interest that the bank calculates Payee on checks may not have cashed them yet

How to Reconcile Your Account Write the ending balance shown on your

statement Total your deposits that you have made

that are not on the statement, and add them to the bank’s balance

List the debits that have been made that do not appear on the statement, and subtract those from the bank’s balance

Subtract any charges or fees from the bank If the totals do not match, check for any

mathematical errors

Types of Accounts Individual account Joint account Special account

Service charge/month, fee/check

Standard account Set monthly service, no check fee

Interest-bearing account The balance in your account can earn interest, but it

cannot fall below a certain minimum average or you will have a charge

Share account Checking account at a credit union

Guaranteed-Payment Checks Certified check

A personal check that the bank guarantees to be good.

This reduces the risk of cashing a stranger’s check and the possibility of it bouncing

To get a check certified, write your personal check out, bring it to the bank, and the bank will immediately deduct the amount from your account, stamp “certified” on the check and initial it.

The bank is putting a hold on that money so that it is there when the payee cashes it.

There will be a small fee for this service

Guaranteed-Payment Checks Cashier’s check

A check written by the bank on its own funds. You pay for it through a withdrawal from your

savings or checking account, or with cash After the bank receives your payment, they

write out the check to the payee specified, for that amount

Generally used when the payee requires a guaranteed payment and cash is not wanted.

If you have questionable credit, a payee may want to be paid with a cashier’s check

It is also good if you want to make an anonymous payment– the bank’s name is on the check, not yours

Guaranteed-payment Checks Traveler’s checks

Check forms in specific denominations that are used instead of cash when traveling.

Many businesses that will not accept an out of state personal check will accept a traveler’s check for payment.

When traveler’s checks are purchased, money is taken from your bank account to cover them.

You sign each traveler’s check in one place immediately upon purchase. When cashed, you present ID and sign in another place.

Traveler’s checks are safer than carrying cash and are payable only upon comparison of endorsements.

Guaranteed-payment Checks Money order

Used when people do not want to use cash or do not have a checking account.

It is like a check, except that it can never bounce because it is pre-paid for.

There is a charge for a money order You can also purchase one at a post

office or possibly a local store.

Other Banking Services Debit card

Allows immediate deduction from the checking account when used, and you do not have to write out a check for the purchase.

You still need to record the transactions made with a debit card in your checkbook register!

Other Banking Services Bank credit card

Banks offer credit cards, like Visa and Mastercard.

When you use a credit card, the transactions add up and you receive a total at the end of the month that you have to pay. More on this in future chapters.

Other Banking Services ATMs

Many banking transactions can be made through electronic funds transfer (EFT)

You can make withdrawals and deposits to your account through an ATM

For many banks, if you use an ATM other than their own, you will have a service fee from the ATM and from your bank– these can add up!

Online and Telephone Banking Banks offer this service so that you can

access you accounts from a computer or telephone in the event you need to transfer money from one account to another or to authorize the bank to pay bills

Stop Payment Order A request that the bank not cash a

check Usually happens if the check has been

lost or stolen The bank charges a significant fee for

this service, but the check will not be able to be cashed if it is brought to the bank

Other Banking Services Safe Deposit Boxes

Allows customers to store valuable items or documents in the bank vault.

A yearly fee is charged for use Birth certificates, marriage and death

certificates, deeds and mortgages, stocks and bonds, jewelry, coin collections, small valuables are common things people keep in safe deposit boxes.

You fill out a signature form when you rent the box and each time you go you must sign the form, preventing others from accessing your box

Other Banking Services Loans and Trusts

Banks also make loans to finance purchases of cars, homes, vacations, home improvements, etc.

Notary Public Verifies a person’s identity, witnesses

the person’s signature on a legal document, and then “notarizes” the signature as valid.

Banking Fees Banks charge fees to help cover

their operating costs. Loan fees, check fees, overdraft fee,

NSF checks, using tellers, cashier’s and certified checks, ATMS, monthly service charges, etc.

Try to avoid fees!!