A deposit account is a bank account
maintained by a
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...
in which a customer can deposit and withdraw
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 primary functions which distinguish money are as ...
. Deposit accounts can be
A savings account is a bank account at a retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditionally, transac ...
s, current account
s 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
of 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 customers
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is disti ...
on their account balances.
Types of accounts
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
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
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
, internet banking,
Electronic funds transfer at point of sale (EFTPOS; ) is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale. EFTPOS ...
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 that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to ...
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 is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
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 is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve ...
. 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
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
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 is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in p ...
). 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).
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 requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...
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 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 bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
* Ethical banking