D Essay questions

1 How do the commercial banks make a profit, and what do they do with the profits which the make?

2 Write one or two sentences on each of the following:

a a bank standing order;

b an overdraft arrangement with a commercial bank;

c the main differences between a deposit account and a current account;

d the personal loan method of lending; e the bank statement.

3 Give examples and explain five services given by the commercial banks to their customers.

4 (a) Explain the main differences between the deposit account and the

current account. What are the main uses of these two kinds of account?

(b) What security arrangements do the banks make to protect their customers’ cheques?

(c) When is a cheque endorsed?

5 The following table concerns four banks and their indebtedness to each other at the end of a day’s banking. Thus, for example, bank A owes itself nothing, but it is owed £5 million by bank B and £2 million by bank D; on the other hand it owes bank C £\ million. Therefore its ‘balance’ at the end of the day (shown in the end column) is minus £6 million, which means that it is owed £6 million.

Gearing house figures at the end of S day’s banking (£ million)

Bank	A	B	C	D	Balance
A		-5	+1	-2	-6
B	+5		-4	-1	0
C	-1	+4		-2	+1
D	+2	+1	+2		+5
Total	+6	0	-1	-5	0

Using these figures as a guide, explain how the clearing house system works.

4. Opening a bank account and the use of cheques

If you decide to deposit some money in a bank you will have to choose between either a deposit account or a current account. You may, of course, open both. Before the bank will permit you to do business with them you" must officially ‘open’ an account.

OPENING AN ACCOUNT

1 The bank will need a reference from someone the bank ‘knows’.

2 The bank will need an address to send statements to.

3 The bank will ask for your signature to use as a specimen copy.

4 A paying-in book will normally be issued.

5 You will have to make a deposit in order to open the account.

6 If the account is a current account then a cheque book will normally be issued.

Cheques

A cheque is an instruction to a banker to pay a certain sum of money. Each cheque has three numbers on it:

1 the branch number;

2 the cheque’s serial number;

3 the account number of the customer.

Each cheque has a counterfoil attached to it so that the owner can keep a permanent record of the cheques he writes.

The signature of the drawer must correspond with the specimen held by the bank.

Any alterations made on the cheque must be countersigned by the drawer of the cheque or it must be destroyed and a new cheque made out.

The person who writes out the cheque is called the drawer. The person named to benefit from the cheque is called the payee.

Dishonored cheques

The payee will not be paid by the bank in the following circumstances:

1 The drawer has insufficient funds to meet the cheque and the bank writes R.D. (refer to drawer) on the cheque and returns it to the payee.

2 The drawer stops payment for some reason.

3 The drawer closes his account.

4 The signature is forged or illegible.

5 The cheque has been altered and not countersigned.

6 The bank has been notified of the death, bankruptcy or insanity of the drawer.

There are two types of cheque generally used.

1. The open cheque.

2. The closed cheque.

The open cheque

This may be ‘pay cash’ or it may be to pay a certain person or organization that is named on the cheque. It is a very insecure method of payment. If the cheque is lost it is quite easy for almost anyone to cash it at the bank.

The open cheque

	Date
Bank's name
Pay cash (or the payee's name)
The amount written in words
(the pence written in figures)
c.n. b.n. a.n.	Signature

The closed cheque

This type of cheque is also known as a crossed cheque. It may be made out to pay a person or a business organization, and by crossing it in a special way, the drawer ensures that only the person named on the cheque gets the money. The normal method of crossing a cheque is to draw two parallel lines from the top of the cheque to the bottom and insert the words & Co between the lines. Most business organizations use the crossed or closed cheque, for it is a very safe method of making payment. The closed cheque can only be ‘cleared’ through a bank account.

The crossed cheque

	Date
Bank's name
Pay the payee's name\	\
(the amount in words	\
and figures) \	\ £
c.n. b.n. a.n.	\ Drawer's signature

Special crossing

Endorsement

If you receive a cheque and you do not have a bank account into which you can pay the cheque, then you may endorse it by signing it on the back and asking any person with a bank account to give you cash in exchange for the endorsed cheque. That person can then pay the cheque into his account in the normal way.

The bank statement

The majority of depositors have a statement sent to them once a month. Most of the statements are prepared by computer.

Date	Details	Debit	Credit	Balance
1st Jan	Cash		£200	£200
3rd Jan	Ch. 001	£50		£150
10th Jan	Ch. 779		£100	£250
12th Jan	Cash	£200		£50
16th Jan	Ch. 372		£125	£175
30th Jan	Cash	£25		£150

Answer the following questions in your notebook.

A

1 Draw a diagram of an open cheque.

2 Draw a diagram of a closed or crossed cheque.

3 Draw any two types of crossing that you know.

4 Who is the drawer of a cheque?

5 Who is the payee of a cheque?

6 What do we mean when we say that a cheque has been stopped?

7 When will the bank write R.D. on a cheque?

8 What are the advantages of having an open cheque?

9 When is a cheque endorsed and how is it done?

10 What are the advantages of using a crossed or closed cheque?

B

1 When opening a b__________ account, a ref__________ is needed.

2 When opening a bank account, a s__________ sig__________ is needed.

3 The person opening a bank account must also give his a__________ to the bank.

4 There are two types of account, the d__________ account and the c__________ account.

5 With a d__________ account a b__________ book is issued.

6 With a c__________ account a c__________ book is issued.

7 There are three numbers on a cheque, the b__________ number, the s__________ number of the cheque, and the a__________ number.

8 Each cheque has a counter __________ attached to it.

9 If you want to make your cheque very safe you would c__________ it.

10 A cheque must not be altered or disfigured otherwise it will be dis__________.