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Questions and Answers
Which type of account is primarily designed to encourage saving?
Checking accounts earn a high amount of interest due to the rapid turnover of transactions.
False
What happens when a check is not negotiated within six months of issuance?
The check becomes stale.
A _______________ account allows the depositor to invest money at a fixed interest rate for a set period.
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Match the following checks with their descriptions:
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What is the main purpose of a bank statement?
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A payee is the person who writes a check.
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What is an outstanding check?
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What should be done with a deposit in transit?
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An NSF check should be deducted from the book balance.
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What type of error occurs when an amount is erroneously credited to the wrong account?
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An amount of cash recorded as _____ would be subtracted from the book balance if it is actually a debit memo.
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Match the following items with their corresponding actions:
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When an error understates the cash balance, what is the appropriate action to take?
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An overstated book balance always means a higher actual balance is present.
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What is a credit memo received from the bank primarily used for?
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Study Notes
Savings Account
- Provides incentive for depositors to save money.
- Earns minimal interest and requires a minimum balance.
- Can be linked to passbooks, ATM or debit cards.
Checking / Current Account
- Withdrawal of cash is made through a bank check.
- Rarely earns interest due to fast transaction turnover.
Time Deposit
- Allows the depositor to invest money at a set interest rate for a preset period (months to years).
- In exchange for a set interest rate, the depositor agrees not to withdraw funds during the contract period.
Unit Investment Trust Fund
- Investment company offering a fixed portfolio (stocks & bonds) as redeemable units for investors for a defined time period.
Bank Checks
- Written and signed instrument instructing a bank to pay a specific sum of money to a bearer.
- Widely accepted form of payment.
- Allow two or more parties to make a monetary transaction without physical exchange of cash.
- Drawer/Payor: Person/entity writing the check.
- Drawee: Bank on which the check is drawn.
- Payee: Person/entity being paid.
Types of Bank Checks
- Crossed check: Restricted for payee's account only. Can only be deposited to the payee's account and cannot be encashed.
- Stale check: Check not negotiated within six (6) months from the date of issue.
- Postdated check: Check issued on a future date and can only be negotiated starting from the date on the check's face.
Bank Statement
- Detailed transaction history of the account over the reporting period.
- Issued by a bank to each depositor monthly.
- Shows:
- Balance at the beginning of the period.
- Deposits and other amounts added during the period.
- Checks and other amounts subtracted during the period.
- Balance at the end of the period.
Reconciling Bank Statement with Book Balance
- Reconciling a bank statement with the book balance helps detect errors and discrepancies.
Reasons for Differences Between Bank and Book Balances
Bank Balance:
- Outstanding checks: Checks already deducted from the business's records but not yet cleared by the bank. Deducted from the bank balance.
- Deposits in transit: Deposits made by the business but not yet reflected in the bank's records. Added to the bank balance.
Book Balance:
- Credit memo received from the bank: Added to the book balance.
- Collection directly credited to the account: Added to the book balance.
- Debit memo received from the bank or bank service charges: Bank charges deducted from the account. Deducted from the book balance.
- NSF Check: Returned check due to insufficient funds. Deducted from the book balance.
- Errors understating the cash balance: Added to the book balance.
- Errors overstating the cash balance: Deducted from the book balance.
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Description
Test your knowledge on various banking accounts, including savings accounts, checking accounts, time deposits, and unit investment trusts. Understand key features, benefits, and functions of each account type and related instruments. This quiz will help you grasp essential banking concepts.
