Types of bank accounts
/A bank account is a record maintained by a banking institution, in which it records an ongoing series of cash inflows and outflows on behalf of a customer. The bank account also shows the current balance of cash in the record as of any point in time. If there is more than one individual who has access to the account, it is known as a joint account.
When a bank account has a positive balance, which means that the bank is storing money on behalf of a customer, the account has a credit balance. Conversely, when the bank account has a negative balance, where the customer owes money to the bank, the account has a debit balance. This is the reverse of the meaning of debits and credits within a business, where a debit balance means that a business has accumulated assets, and a credit balance means that the business has accumulated liabilities.
The following list describes a number of the more common bank account types.
Checking Accounts
A checking account is the most basic and useful type of bank account. It is designed to have an unlimited number of deposits and withdrawals (though each one may be subject to fees), and does not allow for interest to be paid on any residual balance in it. There is not usually a restriction on the amount of cash held in a checking account, nor on how long it must be held. Special types of checking accounts include:
Interest-bearing account. There are variations on the checking account concept that are interest bearing. However, they have more restrictions that a standard checking account (such as a maximum number of check payments to be issued each month), and may require a minimum balance.
Zero balance account. This account is funded only enough to meet the requirements of checks being presented for payment. By keeping the funded balance low, a company can keep most of its cash in an interest-bearing investment.
Related AccountingTools Courses
Savings Accounts
There are a number of variations on the savings account concept, but the basic idea is that it is a store of cash; thus, no or few checks are written against the account. Depending on the type of savings account, there may be restrictions on the minimum amount of cash held in the account, as well as on the minimum time period over which the cash must be held in the account. Several variations on the savings account concept are:
Money market account. This account offers slightly higher interest rates in exchange for more restrictions on withdrawing funds from the account.
Individual retirement account (IRA). This account stores funds that an individual is setting aside for his or her retirement. Funds placed in these accounts are tax-advantaged in different ways, depending on the type of IRA that has been set up.
A bank earns money on the bank accounts it manages by charging user fees, as well as by earning incremental interest income on funds held in these accounts, net of any interest paid to the holders of the accounts.
Certificates of Deposit
A certificate of deposit (CD) is a longer-term deposit arrangement with a financial institution, where the institution offers either a guaranteed fixed interest rate or a variable rate of return for the CD holder. There can be restrictions on the ability of a CD holder to cash in early, usually involving the loss of a portion of the interest that has already been earned. This is essentially a promissory note, issued by a financial institution to an investor.
Money Market Account
A money market account allows you to invest in a money market fund, which contains a selection of government securities and commercial paper. These funds usually generate a higher rate of return than a savings account or certificate of deposit. However, the funds may not be accessible immediately; you may have to wait one or two business days to gain access to the funds. When a money market account is held through a bank, you may be given check writing privileges on the account, though you may also be limited to just a few checks written on the account per month. All in all, this is a good place to park excess funds for an extended period of time, since it is both safe and produces a reasonable return on investment.