Banking in Accountancy Overview

Banking in Accountancy

Definition: Banking refers to financial institutions that accept deposits, offer loans, and provide various financial services.
Types of Banks:
- Commercial Banks: Offer services to businesses and individuals; provide checking/savings accounts and loans.
- Investment Banks: Specialize in underwriting and facilitating mergers and acquisitions; assist in raising capital.
- Central Banks: National banks that manage currency, money supply, and interest rates; oversee the banking system.
Banking Transactions:
- Deposits: Money placed into a bank account, which can be demand deposits (checking accounts) or time deposits (savings accounts).
- Withdrawals: Taking money out of a bank account; can involve cash, checks, or electronic transfers.
- Loans: Borrowing funds from a bank; involves interest payments and repayment terms.
Bank Reconciliation:
- Purpose: Ensures that the account balance in the company’s records matches the bank’s records.
- Process:
  1. Compare bank statement with company’s cash account.
  2. Identify discrepancies (e.g., outstanding checks, deposits in transit).
  3. Adjust the company’s records to reflect actual transactions.
Banking Regulations:
- Purpose: Maintain financial stability, protect consumers, and ensure soundness of banks.
- Key Regulatory Bodies:
  - Federal Reserve (U.S.)
  - Financial Conduct Authority (U.K.)
  - European Central Bank (Eurozone)
Internal Controls:
- Importance: Prevent fraud and errors; ensure the accuracy of financial reporting.
- Components:
  - Segregation of duties (e.g., different individuals handle cash and record transactions).
  - Regular audits and reviews of bank transactions.
Electronic Banking:
- Overview: Utilizes technology for banking transactions, offering convenience and efficiency.
- Services: Online banking, mobile banking apps, electronic fund transfers (EFT).
Impact on Accountancy:
- Financial Reporting: Accurate tracking of cash flows and liquidity through bank information.
- Cash Management: Effective management of cash resources using banking services and tools.
Key Concepts:
- Interest Rates: The cost of borrowing money from banks; impacts loan repayments and deposit earnings.
- Liquidity: The availability of cash or cash-equivalents for immediate needs; essential for financial health.
- Creditworthiness: Evaluation of an individual or business's ability to repay loans; influences loan approval and terms.

Definition of Banking

Banking encompasses financial institutions that receive deposits, issue loans, and deliver a range of financial services.

Types of Banks

Commercial Banks: Serve businesses and individuals, providing essential services like checking and savings accounts, along with loans.
Investment Banks: Focus on underwriting, mergers, acquisitions, and assisting clients in raising capital.
Central Banks: Manage a country's currency, money supply, and interest rates while supervising the overall banking system.

Banking Transactions

Deposits: Funds added to a bank account; categories include demand deposits (checking accounts) and time deposits (savings accounts).
Withdrawals: Taking money out of an account via cash, checks, or electronic transfers.
Loans: Borrowing money from a bank, which includes interest payments and specific repayment terms.

Bank Reconciliation

Purpose: Ensures alignment between the company's cash account balance and the bank's records.
Process:
- Compare bank statements with company records.
- Identify discrepancies, such as outstanding checks and deposits in transit.
- Adjust company records to accurately reflect transactions.

Banking Regulations

Purpose: To uphold financial stability, protect consumers, and assure the reliability of banks.
Key Regulatory Bodies:
- Federal Reserve in the U.S.
- Financial Conduct Authority in the U.K.
- European Central Bank for the Eurozone.

Internal Controls

Importance: Essential for preventing fraud and errors, and ensuring accuracy in financial reporting.
Components:
- Segregation of duties, ensuring different individuals manage cash and record transactions.
- Regular audits and reviews of banking transactions.

Electronic Banking

Overview: Leverages technology for conducting banking transactions, enhancing convenience and efficiency.
Services Offered: Includes online banking platforms, mobile banking applications, and electronic fund transfers (EFT).

Impact on Accountancy

Financial Reporting: Facilitates accurate monitoring of cash flow and liquidity using banking data.
Cash Management: Emphasizes effective management of cash resources through available banking services and tools.

Key Concepts

Interest Rates: Represents the cost incurred when borrowing funds; directly affects loan repayments and deposit earnings.
Liquidity: Denotes the accessibility of cash or cash-equivalents for immediate use, crucial for maintaining financial health.
Creditworthiness: Assesses an individual or business's capacity to repay loans, affecting the likelihood of loan approval and influencing terms.