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A deposit account is a
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried out between a buyer and a seller to Trade ...
maintained by a
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
in which a customer can deposit and withdraw
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
. Deposit accounts can be
savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
s, current accounts or 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 a
liability Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, retai ...
of the bank and represents an amount owed by the bank to the customer. Some banks charge fees for transactions on a customer's account. Additionally, some banks pay customers
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
on their account balances.


Types of accounts

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How banking works

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 as
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s of 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., by
cheque A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
, internet banking,
EFTPOS Electronic funds transfer at point of sale (EFTPOS; ) is an electronic payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for e-commerce, online transactions. Also known ...
or 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. 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. (See
double-entry bookkeeping system Double-entry bookkeeping, also known as, double-entry accounting, is a method of bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measureme ...
.) 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 per
monetary policy Monetary policy is the policy adopted by the monetary authority In finance and economics, a monetary authority is the entity that manages a country’s currency and money supply, often with the objective of controlling inflation targeting, infla ...

monetary 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 as
fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
. 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 the
money supply In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
in 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 not
legal tender Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
). The customer's checking account balance has no dollar bills 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

Banking operates under an intricate system of customs and conventions developed over many centuries. It is also normally subject to statutory regulations, such as
reserve requirement A reserve requirement is a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, and oversees their commercia ...
s developed 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 a
deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of a ...
scheme, or be protected by a
government guarantee A loan guarantee, in finance, is a promise by one party (the guarantor In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and manag ...
scheme.


See also

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Bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

Bank
*
Capital market A capital market is a financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Swed ...
*
Ethical banking An ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making lo ...


References

{{Authority control Banking terms Bank deposits Banks Financial services