Checking Account

What is Checking Account?

Checking Account, also known as a transactional account, can be defined as a kind of deposits account held by a financial institution or non-banking financial institution which allows the holder of the account to deposit and withdraw money. This is one of the most liquid forms of money. It differs from a normal bank savings account since it allows multiple deposits and withdrawal in a particular period.

Types of Checking Account

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• Personal – This is one of the most common types. It can be said as a customized containing feature of several other types.
• Business – This type helps an entrepreneur to maintain his business records separately from personal records. Many banks do offer this checking account, which helps in maintaining accurate and authentic information required for business tax filings.
• Interest Bearing -This type allows the owner to earn interest on the amount deposited in such an account.
• Money Market Account – In essence, a money market accountMoney Market AccountMoney Market Account is the account which receives all the interests from the instruments in the money market according to the agreed-upon terms. This account is separate from that of securities account, it only accounts for the proceeds.read more is a kind of savings account that allows deposits and withdrawal of money with ATM, debit cards, etc. although there are restrictions on a maximum number of transactions.
• Student Account – This is primarily for children, and therefore it is also known as a minor checking account. There is no requirement of any banking or credit history for opening this account.
• Joint Account – As the name suggests, this type of account allows dual ownership of a single account.

Examples of Checking Account

Let us understand this concept with the help of some examples: –

Example #1

Calculate the closing balance of Mr. David’s account with the following mentioned details:

• David Opened interest-bearing checking account with $ 1,00,000 on 01-01-2016,
• David further invested in 01-01-2019 $50,000.
• Rate of Interest is 12% p.a. Yearly compounded.
• Calculate the closing balance, which will accrue to Mr. David on 31-12-2019.

Solution –

Closing balance accruing at 31-12-2019 will be calculated as follows:

Closing balance as on 31-12-2019 is $2,13,352.

Example #2

With the help of the below-mentioned transactions, ascertain balance in checking account of Mr. David as on 31/03/2019.

Solution – 

Balance in an account as on 31-03-2019 will be calculated as follows:

Advantages

• The person with a checking account can deposit and withdraw money anytime without carrying any cash.
• A person having this account can also use a debit card for making purchases without withdrawing any cash.
• One can directly deposit faster any electronic cheque, which will help in easy access and usage of cash.
• One can make online payments without using cash.
• From the convenience and safety point of view, it is always better to carry a debit card rather than cash.
• The amount deposited in this account is mostly insured.
• It adds to the goodwillThe GoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more of a person who is maintaining a Checking Account for purchasing any house/flat/Car etc.
• This account has a low maintenance cost.

Disadvantages

• Financial Institutions(FI) can Block Access of Cash. If the financial institution holding your Checking account observes defaults in maintaining Account balance, they may restrict cash balanceRestrict Cash BalanceRestricted cash is the portion of cash that has been set aside for a specific purpose. It is usually held in a special account (for example, an escrow account) so it remains separate from the rest of a business’ cash and equivalents.read more usage by either blocking purchases, blocking withdrawals, etc.
• Reflecting Only Negative Part – If a person defaults in maintaining balance, FI will report this default immediately. Still, on the opposite side, if the person maintains regularly, the same may not be reported.
• Tracking of Spending Habits – Organisations may trace the spending habits of an individual with the help of artificial intelligence.
• Cost of Maintaining – This account is not free of cost; there are certain charges which need to be paid.

Important Points

Conclusion

A checking account is a kind of deposits account that allows the holder to make a withdrawal and deposit money. It is also known as a demand account or transactional account. There are various types of checking account which caters the need of different individuals like personal, Business, Interest-bearing, student account. Depending on the need and eligibility, one can choose any of them.

It helps the holder to make online purchases or use the ATM debit card for making purchases without carrying cash. It offers convenience and safety to the holder, and it also increases cash mobility. Sometimes financial institutions may reflect only a negative part of the account holder. Also, sometimes FI may place restrictions on cash withdrawals, which may be dissatisfying.

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