The Basics of Checking Accounts

How Checking Accounts Work

• A check is a written order directing a bank or other financial institution to pay money on demand to the person or company named on it.

• A customer opens a checking account by depositing money into a bank.

• The payee can either deposit the check or cash it.

• Most banks offer several types of checking accounts.

  • A regular checking account is designed for customers who write a few checks each month and do not keep a minimum amount of money in the account.

• Direct deposit allows electronic transfers of payments directly from the payer’s account to the account of the person being paid.

  • An interest-bearing account is an account that earns interest on the balance for the depositor.

  • You might also open a joint account, an account that allows two people who are equally responsible for the account to write checks

• Once you decide what type of account you want, you must fill out a signature card at the financial institution.

  • A signature card is a record of an account holder’s signature used to verify identity.

Account Services and Other Offerings

• When an account is overdrawn, it means that the account owner has written checks for more money than the balance in the account.

  • An overdraft is the amount that is overdrawn.

  • Overdraft protection is a line of credit for overdrawn checks.

    • You may pay a service fee and interest for overdraft protection.

• A stop payment is an order for a bank not to cash a particular check.

  • It also usually requires a fee.

• A debit card is a bank card that immediately takes money from a checking account when it is used.

• Technology allows consumers to handle many banking transactions over the Internet.

• Online banking allows consumers to check their account balances, transfer money, or pay bills at any time.

Account Records

Keeping Track of Financial Transactions

• An advantage of checking accounts is that they enable consumers to keep records of their financial transactions.

• There are usually three people, or parties, named on a check.

  • The payee is the party to whom the check is written, or who is cashing the check.

  • The drawer is the party who wrote the check and is paying the money, or drawing it from an account.

  • The third party is the drawee, the financial institution where the drawer has an account.

• Banks and other companies use the information printed on checks to route a check to your account for payment

• When you write a check, record the check number, the amount of the check, the date, and the name of the payee in a check register.

  • A check register is a checkbook log in which an account holder records checking account transactions.

• To deposit cash or a check in your account, fill out a deposit slip.

• To deposit or cash a check requires an endorsement, or the signature of the payee on the back of the check.

• Once a month, banks issue a bank statement, the bank’s record of all the transactions in a checking account.

  • The statement includes a record of all withdrawals, deposits, interest, and fees.

  • It also includes a record of all canceled checks, or checks that have been cashed.

Reconciling Your Account Records

• Bank reconciliation is the process of seeing whether an account holder’s records agree with the bank’s records for the account.

  • The first step to reconciling your account is to see whether the bank has processed all of your checks and deposits.

• With the bank statement and your check register, you can identify your outstanding checks, or checks that have been written but have not yet been cashed.

• If you have made any deposits or ATM withdrawals that have not been recorded on the bank statement, those transactions should be factored into the bank statement balance.

• Once the balance on the bank statement and the balance in your check register are the same, you have reconciled your check register balance with the bank statement balance.