Welcome! Today, we will be looking at another sub topics in Financial Institutions. Do have a great time studying with us.

Lesson Note

Subject: Economics

Topic: Financial Institutions

Subtopic: Bank Account/Cheque

Learning Objectives: By the end of the lesson, the learners should be able to:

  1. Define Bank Account;
  2. Explain the types and features of back account;
  3. Compare the differences that exists among the types of bank accounts.
  4. Define a cheque
  5. State the characteristics and advantages of a cheque;
  6. Identify the parties to cheque;
  7. State and explain the types and forms of a cheque;
  8. State the precautions to taken when drawing a cheque;
  9. State the reasons for crossing a cheque
  10. Give reasons for dishonouring a cheque.

Discussions

BANK ACCOUNT:

Bank account can be defined as a legal document created by the bank for its customers for transactions purpose. The transactions is mainly deposits, withdrawals and customer care services. When a bank account is opened or created, the customers are issued check or passbook depending on the nature of the account, for easy withdrawals.

TYPES OF BANK ACCOUNT

There are three types of account which customers can open in a bank. These are current, fixed deposit and savings account. Let’s look at these and their features.
(1) Current Account: Current account is the type of bank account usually operated by businessmen and organisations and is required if a customer wishes to make payments through cheques. In a current account, the customer is free to withdraw money on demand. The customer will be given a cheque book which he uses to withdraw money any time. Holders of current accounts are not entitled to interest but are charged commission by the bank. They can obtain loans and overdrafts from the bank. Simply put, current account is an account on which cheques are drawn.

Features of current account

i. Money can be withdrawn frequently.
ii. Customers are entitled to the use of cheque book.
iii. Payment of commission is made by the customers to the bank.
iv. Holders of current account are not entitled to interest.
v. Other people can withdraw money from the account on behalf of the customers.
Procedures for opening a current account
i. The customer will collect and fill an application form.
ii. He/she will submit a prescribed number of passports photograph.
iii. Two guarantors or referees must be provided to recommend the applicant.
iv. The customer will submit his/her complete particulars to the bank, showing personal details, especially when the account is an individual account but when it is a corporate account, other documents like certificate of incorporation, memorandum and articles of association, etc, must be added.
v. The bank will issue him with a pay-in slip booklet.
vi. He/she will be issued an account number.
vii. He/she will pay an initial deposit.
viii. A cheque book will also be given to him/her.

(2) Savings account: Savings account is the most common form of bank account. It encourages the low income earners to form or develop the habit of saving. This type of account is operated with the use of passbook. Owners or holders of savings account are paid interest for keeping their money in the bank and if withdrawals are more than twice in a month, it may not attract interest.

Features of savings accounts

i. Money can only be withdrawn occasionally if interest is to be paid.
ii. It attracts a favourable rate of interest.
iii. Holders are issued with a passbook.
iv. Withdrawals cannot be made by another person on behalf of the customer.

Differences between savings account and current account

Savings Account
Current Account

i. In savings account, Customers are issued with passbooks while Customers are issued with cheque books in current account.

ii. It attracts interest
No interest is given to customers

iii. Only the holder can withdraw from savings account but other people issued with a cheque can withdraw from current account.

Withdrawal is occasional if interest is to be given with savings account whereas with current account, withdrawal can be frequent.

(3) Fixed deposit account: Fixed deposit account also called time account deposit, is the type of account that is usually operated by individuals and organisations who have excess liquidity. They put part of the excess liquidity or money in the fixed or time account in order to earn interest. Holders are entitled to higher interest than savings account. Customers can withdraw subject to seven days of notice. People save money in deposit account for a specific purpose and it can be renewed on maturity. The customer will be issued with deposit account passbook. Fixed deposit is withdraw at an agreed time.

Features of deposit account

i. Money is deposited for a specific period of time.
ii. It attracts higher interest rate.
iii. Notice of seven days must be given before withdrawal.

CHEQUES

The Bill of Exchange Act defines a cheque as: “A bill of exchange drawn on a banker payable on demand.” In other words, a cheque is an order written by the drawer to a bank to pay on demand a specified sum of money to the person named as payee on the cheque. To complete a cheque, the drawer inserts the name of the payee, the amount he is to be paid in words and figures, date and signature.

Features or characteristics of a cheque

i. A cheque is an order to pay.
ii. It is an unconditional order.
iii. The amount must be specified.
iv. It must be in writing and not paid.
v. The account number of the drawer is stated.
vi. The name and branch of the bank appear on the cheque.
vii. It is addressed by one person to another.
viii. The name of the payee must be shown on the cheque.
ix. A stamp duty is paid on a cheque.
x. Amount must be clearly written in words and figures.

Advantages Of Payment By Cheque

i. Convenience: It is more convenient to carry cheque about than cash.
ii. Safe means of payment: Cheque is a safe means of payment, especially when it is crossed, the risk of loss is eliminated.
iii. A proof of payment: Cheque can serve as a receipt and a proof of payment.
iv. It save time and energy: Using cheque to pay large sums of money saves time and energy of counting the cash.
v. Security: It is safer to carry cheque than cash for security reasons.
vi. Easy to stop payment: It is very easy for the drawer to stop payment to prevent fraud.

Precautionary Measures To Be Taken When Drawing A Cheque

i. The signature must be consistent.
ii. The drawer must sign any alteration on the cheque.

iii. The cheque must not be folded.
iv. The amount must be written in figures and words.
v. The name of the payee should be properly written on the cheque.
vi. The signature must be such that it cannot be easily forged.

Parties To A Cheque

There are three major parties to a cheque. These are;
(A) Drawer: Drawer is the person responsible for drawing a cheque. He is the owner of the account on which the cheque is drawn. The drawer is the debtor who signs the cheque and orders the bank to pay his creditor.
(B) Drawee: Drawee is the bank on which the cheque is drawn, i.e. the bank where the cheque will be presented for payment.
(C) Payee: Payee is the person to whom the cheque is made payable, i.e. the person to whom payment is directed to be made. The payee is usually a creditor to the drawer and must present the cheque to the drawee for settlement. Lets take for for example, if Mr. Donald writes a cheque to Mr. Lawrence to be drawn from Zenith Bank Plc, in this transaction, Mr. Donald is the drawer and Mr. Lawrence is the payee while Zenith bank Plc is the drawee.

Types of Cheques

1. Order cheque: Order cheque is made payable to a person or firm named on it, or an order which requires the endorsement of the payee unless he pays it into his own bank account. A cheque that is drawn payable to payee. The payee can endorse it to another person and this turns it into a bearer cheque.
2. Bearer Cheque: Bearer cheque is payable to the bearer, i.e. whoever presents it. The bearer cheque is payable without any endorsement. It can be cashed over the counter without having to be endorsed by the person presenting it.
3. Open Cheque: Open cheque can be presented and cashed over the counter of the bank which it is drawn. Open cheque is not crossed. It is used for drawing cash from the bank paying the creditors who have no current account. This is risky because it can be paid to a wrong person.
4. Crossed Cheque: This is a cheque having two parallel lines drawn across its face. Crossed cheque cannot be cashed at the counter; it must be paid into a current account. Some words may be written between the parallel lines, e.g. “&Co” or “Non negotiable”. This helps to prevent fraudulent practices.

Forms Of Creating A Cheque

There are several types of crossing which can be used to place restriction on the negotiability of a cheque. They are:
(a) General crossing: General crossing is a form of crossing in which two parallel transverse lines are drawn across the face of the cheque with or without the addition of the words “&Co” or “Non-negotiable”. This type of crossing prevents payments over the counter. The cheque can only be paid into a current account. There is no bank named on it.
(b) Special crossing: In special crossing, the name of a bank is inserted between the transverse lines. This restricts payment to a specific named bank. The effect is to make the cheque payable only to the banker specified in the crossing. It is a precautionary measure to make a cheque safer.

Other Forms Of Special Crossing
i. Non-negotiable: Non-negotiable is another form of special crossing in which the cheque cannot be paid to any person except the bearer of the name on the cheque. This phrase will deprive the cheque of its negotiability, i.e. prevents its further transfer. It is added to protect the owner against thieves.
ii. A/C payee only: A/C payee only is a directive to the bank that the proceeds of the cheque are to be paid only into the amount of the person or firm named on the cheque, i.e. the payee. Any cheque with this form of crossing cannot be negotiated or transferred by endorsement to another person. It operates as notice to the collecting bank that only the account of the payee is to be credited.

Reasons for crossing a Cheque

i. It protects the owner against damage by loss or theft.
ii. It prevents the cheque from being paid over the counter.
iii. Crossing restricts a cheque to a particular bank.
iv. The holder of a crossed cheque must pay it to his account.
v. It can help in tracing the culprit in case the cheque is stolen.

Other forms of cheque

a. Stale cheque: Stale cheque is the type of cheque which has been in circulation for an unreasonably long period of time, hence the date of presentation for payment has expired. The bank will refuse to honour a cheque that is more than six months old because it is considered expired.
b. Post dated cheque: Post-rated cheques are cheques that bear a date later than the current date on which they are drawn, i.e it is dated for some future time. Such a cheque cannot be cashed before the proper date.
c. Dishonored cheque: A dishonoured cheque is one which a banker, for some reasons, has refused to pay on presentation. Such the cheques generally have some explanatory phrase written on them stating the reason why such cheques cannot be paid or honored.

Reasons For Dishonouring A Cheque

i. Insufficient fund: A cheque can be dishonoured for lack of sufficient funds in the account.
ii. Irregular signature: A cheque will not be honoured if the signature is not regular.
iii. Difference in figures and words: If the figures and words of on the cheque do not agree, the cheque will be rejected.
iv. No date: A cheque can be dishonoured if there is no date on it.
v. Alteration of cheque: If alteration on the cheque is not signed against by the drawer, the bank will not honour it.
vi. Bankruptcy: If the bank receives notice of default of the drawer, it will reject the cheque.
d. Certified cheque: A certified cheque is a cheque which has been ratified by the bank in order to guarantee that the drawer has sufficient funds in the account to settle debt. A bank also ratifies a cheque in order to authenticate it.

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Take a quick test for this lesson

  1. Define the term bank account.
  2. What are the types of bank account? State the features of each account stated.
  3. What are the differences between savings and current accounts?
  4. Define a cheque
  5. State the characteristics and advantages of a cheque;
  6. What are the parties to a cheque?
  7. State and explain the types and forms of a cheque.
  8. What are the precautions to be taken when drawing a cheque?
  9. State the reasons for crossing a cheque.
  10. A cheque may be dishonoured sometimes. What could be responsible for this?

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