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English for banking
1. A bank account For the safety, convenience and many other benefits, more and more people open a bank a/c. An a/c is a record of a customer’s money transactions (deposits and withdrawls). Its form is like the letter T with Debits on the left and Credits on the right. An a/c can have either credit or debit balance. A credit balance is the statement of an a/c when more money is deposited than withdrawn while a debit balance is when less money is deposited than withdrawn. Every month a/c holders are given an a/c statement showing the month’s transactions, consiting Date, Detail, Debits, Credits and Balance and pay an a/c charge, but if they can keep their a/c in credit, this service will be free of charge. Banks will make a note of credit or debit entry in customer’s a/c when they pay money in or out their a/cs. When a customer deposits $50 in his a/c, the bank credits this amount to the customer’s a/c and at the same time debits $50 to the bank’s a/c. This is an example of double entry. Deposits on an a/c may be demand or time. Normally, the demand deposit a/c pays no or very little interest whereas the time to pays interest. The interest rates paid by banks vary from bank to bank, depending on how long customers leave their money in the bank: short, medium or long term. The longer the money remains in the bank, the more interest it earns. With time deposits, a/c holders usually withdraw their money at maturity date but they can take the money out of the a/c before the maturity date if they want. In this case, some interest will be lost. A withdrawal slip is usually used to withdraw money from an a/c. However, current a/c holders can withdraw money from their a/c by writing cheques. In this case, they do not need to write their names as the payee of the cheque, but write “cash” or “self”. To open an a/c, the applicant is required to fill in an a/c opening application form and to deposit some money. An a/c can be opened for individuals or a company. The former is the personal while the latter is the coporate or a business a/c. In general, the procedures of opening a coporate a/c are (S = “The procedures of opening a coporate a/c” that’s why we use “are”) more complicated than a personal one. To close an a/c, it is necessary to withdraw all the blance on it. There are different types of a/c to meet the various needs customers: current (checking), deposit and savings a/c, sole and joint a/cs, personal and coporate a/cs. 2. Cheque A cheque is an order by the account holder to withdraw funds from his a/c, either is cash through payment to another party Cheques provide both safety and convenience. A cheque is a non-cash payment instrument, i.e customer do not need to carry large amounts of cash with them, which is easy to be lost or stolen. In addtion, a cheque is only valid when it is signed by the a/c holder and is secured by a cheque card so your money can not be withdraw from your a/c if someone finds your cheque book. Using cheques is convenient because they are easy to use. The a/c holder can draw a cheque anywhere without going to the bank such as in shops, supermarkets, restaunrants, hotels and so on. When drawing a cheque, it is obligatory to complete all. The drawer must write cheques in ink and avoid as much blank as possible for fraudulence and use the ruler to cross out any blanks. In the case of a blank cheque book being used, all the cheques need to be crossed, with “not negotiable”. If the cheque is corrected or changed, the drawer must initial the correction in addition to his usual signature. In effect, a cheque presented will be honoured if there is enough money in the drawer’s a/c. Different types of cheque book are supplied to a/c holders free of charge according to their requirements either with or without stubs, bear or order, crossed or uncrossed. Cheque books can be sent to an a/c holder by registered post, or may be given to him at the counter against his signed receipt. Cheque books are considered as security documents in view of danger of their misuse by persons trying to commit fraud. 3. Money All value in the economic is measured in terms of money. Our goods and services are sold for money, and that money is in turn exchanged for our goods and services. Coins are adequate for small transactions while paper notes are used for general business. There is additionally a wider sense of the word money, covering anything which is used as a means of exchange whatever form it may take. Originally, a valuable metal (gold, silver or copper) served as a constant store of value, and even today the America dollar is technically backed by the store of gold which the US government maintains. Because gold has been universally regarded as a very valueable metal, national currencies are considered to be as strong as the national economies which support them. Valuable metal has generally been replaced by paper notes. These notes are issued by government authorized bank, and are known as “legal tender”. Other arrangements such as cheques and money orders are not legal tender. They perform the function of subsititue money and are known as “instrument of credit”. Credit is offered only when creditors believe that they have a good chance of obtaining legal tender when they present such instruments at a bank or another authorized institution. If a man’s assets are known to be considerable, then his credit will be good. If his assets are in doubt, then it may be difficult for him to obtain large sums of credit or even to pay for goods with a cheque. The value of money is bassically its value as a medium of exchange, or as economists put it, its purchasing power. This puschasing power is dependent on supply and demand. The demand for money is reckonable as the quantity needed to effect business transactions. An increase in business requires an increase in the amount of money coming into general circulation. But the demand for money is related not only to the quantity of business but aslo to the rapidity with which the business is done. The supply of money, on the other hand, is the actual amount in notes and coins availble for business purposes. If too much money is availble, its value decreases, and it does not buy as much as it did, say, five years earlier. This condition is known as inflation. 4. Bank and banking Banks are closely concerned with the flow of money into and out of the economy. They often cooperate with gorvernments in efforts to stabilize economies and prevent inflation. They are specialist in the business of providing capital, and in allocating funds on credit. Banks originated as places to which people took their valuables for safe- keeping, but today the great banks of the world have many functions in addition to acting as guardians of valuable private possessions. Banks normally receive money from their customers in two distinct forms: on current a/c and on deposit a/c. With a current a/c, a customer can issue personal cheques. No interest is paid by the bank on this type of a/c. With a deposit a/c, however, the customer undertakes to leave his money in the bank for a minimum specified period of time. Interest is paid on this money. The bank in turn lends the deposited money to customers who need capital. This activity earns interest for the bank, and this interest is almost always at a higher rate than any interest which the bank pays to its depositors. In this way, the bank makes its main profits. We can say the the primary function of a bank today is to act an intermediary between depositors who wish to make interest on their savings, and borrowers who wish to obtain capital. The bank is a reservoir of loanable money, with streams of money flowing in and out. For this reason, economics and financies often talk of money being liquid, or of the liquidity of money. Many small sums which might not otherwise be used as capital are rendered uesful simply because the bank acts as a reservoir. The system of banking rests upon a basis of trust. Innumerable acts of trust build up the system of which bankers, depositors and borrowers are part. They all agree to behave in certain predictable ways in relation to each other and in relation to the rapid fluctuations of credit and debit. Consequently, business can be done and cheques can be written without any legal tender visibly changing hands. 4. Credit Card Credit cards are a means of exchange, not a payment. Ultimate payment by the card user occurs at the end of the month when a cheques is written or a bank a/c is debited to settle the outstanding balance. In that respect, credit cards are akin to trade credit for the users, and a substitute credit long extended by retailers to customers. However, to the seller of goods, sales made to the credit card users have similarities to those made to cheque writers. Costs and fee may differ, but credit card sales vouchers can be effectively credited to the merchant’s bank a/c in a similar manner to cheque received. Because the voucher is a claim on the credit card company or card issuing bank, the risk of non payment is lower. In the ways that most are currently structured, credit card system can be thought of as similar to the cheque payments system. Paper (i.e vouchers) flows in a similar direction, the major difference being the timing of transactions and liabilities incurred along the way. The card holder/voucher writer is given short-term credit (a short-term loan or long-term float) by the card issuing body between the immediate unconditional credit to the merchant involved and delayed collection of value from card holder. The combination of float to card holders and more or less immediate reimbursement to stores is thought to be one factor inhibiting the great use of EFTPOS system, in which float is absent. 5. Debit card vs credit card A few years ago it was easy to tell the difference between a credit card and a debit card. You used your debit card at the ATM with a personal identification number, and you used your credit for purchases. But today both types of cards carry familiar credit company logos, both can be swiped at the checkout counter and both can be used to make online purchases. Government regulations and voluntary steals your credit card you’re only responsible to pay the first $50 of unauthorized charges. And if you notify the issuer before the thief makes any charges, you may not be out of anything. You’re also free from liability if unauthorized purchases occur when the card is not physically presented, say in an interest purchases. Zero liability policies, like those offered by Visa and Mastercard, add a second layer of protection. Under these programs you won’t pay anything if someone fraudulently uses your credit card online or off. The rules are similar for debit cards, but there are a few restrictions. For examples, your liability under federal law is limited to $50, but only if you notify the issuer within two business days of discovering the card’s loss of theft. Your liability could jump to $500 if you put it off. Federal protections are a bit more generous if a thief just steals your debit card number (and not the actual card), but you still have 60 days after receiving your bank statement to report any unauthorized transactions. The Visa and Mastercard Zero liability policies also apply to debit cards, but only to non-PIN transactions. If a thief steals your card and your PIN, the federal rules are your only defense. 6. Cost accounting One of these main objectives of industry is to determine the selling price of the products or the cost of services that are provided by a company. To calculate a selling price that ensures a profit, it is first necessary to determine the cost of making the product or of providing the service. This is the purpose of cost accounting. For manufacturing, where raw materials are assembled into a final product, job- order cost accounting is used. With this method, the account determines the cost of an individual item or a batch of identical goods. The accountant must first determine the direct cost of the product. This includes the material and labor costs. These costs are found by analyzing inventories of raw material, products in the process of being manufactured and final goods. These records are kept in different ledgers. In addition to the direct labor and material costs, the accountants must include overhead to obtain factory cost. Overhead is an expense that is not directly connected to the manufacture of one particular good. Some examples are depreciation of machines, property taxes for the manufacturing plant, and the salary of the plant manager. These indirect costs must be allocated to different products on the basis of a predetermine rate or percentage called the burden rate Cost accounting provides a systematic and logical process by which the cost of a product can be determined. This cost can then be used as a basis for determining the best selling price of a product. It is also a valuable decision-making tool management. 7. Current account A current a/c, known as checking a/c in USA, is the most popular bank a/c. It provides both safety and convenience. Like any other types of bank a/c, it is safe because the a/c holders do not need to carry cash, which can be easily lost or stolen. It is also convenient since the holders are given a cheque book-small booklet full of cheques – to pay their daily bills easily and to withdraw money from their a/cs. Moreover, current a/c holders may be provided with a cash card, which can be used to withdraw money from their a/cs by using ATMs (Automated Teller Machines) and a debit card used to pay for goods or services through auto-payment system without making out a cheque. However, current a/c do not usually pay interest since money on this is usually demand deposit, which can be withdrawn at any time. This does not allow banks to use this deposit to lend out with interest to those who need capital. Current a/c holders may overdraw their a/cs up to a limit called agreed overdraft limit. Sometimes customers write a cheque for more money than they have in their a/c. This is called bouncing a cheque. And if a current a/c holder bounces a cheque the bank usually charges a bounced cheque fee. This is necessary to prevent the holders from writing bad cheques. In practice, however, banks usually require that the holders keep a minimum amount of money in the a/c. This guarantees that the banker will at least be able to lend out a certain amount with interest to pay the costs of processing cheques. If the depositors withdraw money and the balance falls below the minimum the bank will then charge a service charge-a small fee each month. 8. Documentary collection Collection is method of international payment. The term collection refers to the process of presenting an item, such as a check, to the maker for payment. Collections are divided into two categories: clean and documentary. Clean collections means that there are no shipping documents attached. Traveler’s checks and money order are examples of clean collections. Documentary collections means that there are documents included in the collection order which is sent to the exporter’s bank for collection of the payment from the importer. The exporter tells his bank to present the draft and documents to the importer for collection. The exporter bank uses a bank in the importer’s country to accomplish this. This correspondent bank will work with the importer’s bank, and collect the funds and present the bill of lading and other documents to the importer. The bank receives a fee for acting as the exporter’s agent in the collection process. Banks that are actively engaged in such collections may have form letters that give explicit instructions as to how the payments are to be made, the documents that are involved, and other pertinent information. The basic difference between the collection method and a letter of credit is that an irrevocable letter of credit is an obligation of the issuing bank, whereas an exporter’s draft is drawn on the importer. The collection is less costly than a letter of credit and is frequently used when the risks to the exporter are relatively small 9. Finance analysis There are four critical areas of a company’s business which can be analyzed by applying ratio. These are liquidity, capital structure, activity and efficiency, and profitability. Measurements of liquidity should answer the question: Can a company pay its short-term debts? There are two ratios commonly used to answer this question. Firstly, the current ratio, which measures the current assets against the current abilities. In most cases, a healthy company would show a ratio above “1”, in other words more current assets than current liabilities. Another method of measuring liquidity is so-called quick ratio – this is particularly appropriate in manufacturing industries where stock levels can disguise the company’s true liquidity. The ratio is calculated in the same way as above but the stocks are deducted from the current assets. The balance sheet will also reveal the gearing of the company – this is an indicator of the company’s capital structure and its ability to meet its long-term debts. The ratio expresses the relationship between shareholder’s funds and loan capital. Income gearing is also important and show the ratio between profit and interest paid on borrowings. Highly geared companies generally represent a greater risk for investors. The balance sheet and the profit and loss account can be used to assess how efficiently a company manages its assets. Basically, sales are compared with investment in various assets. For examples, in the retail sector, an important ratio which indicates efficiency measurements is to calculate the average collection period on debts. This is found by dividing debtors’ by the sales per day. This can vary tremendously from industry to industry. In the retail sector it may well be as low as one or two days, whereas in the heavy manufacturing and service sectors it can range from thirty to ninety days. Finally, profitability ratios show the manager’s use of the company’s resources. The profit margin figure (profit before tax divided by sales and expressed as a percentage) indicates the operational day-to-day profitability of the business. Return on capital employed can be calculated in a number of ways. One common method is to take profit before taxes and divide by the total assets – this is a good indicator of the use of all the assets of the company. From the shareholder’s point of view, the return on owner’s equity will be an important ratio; this is calculated by dividing the profit before taxes by the owner’s equity and the expressing it as a percentage – If the company does not earn a reasonable return, the share price will fall and thus make it difficult to attract additional capital. 10. Lending The role of lending at commercial bank in the United State has changed dramatically over the years. In the distant past, short-term, self-liquidating loans were the standard. Today, banks provide loans of all maturities and methods of repayment. The principal categories of loans are commercial and industrial, real estate, and individual (consumer) loans. This paper provides the background information about commercial and industrial loans. Such loans are used to finance temporary and permanent business assets. Lines of credit and transaction loans are used for temporary assets and involving loans and term loans are used for permanent assets. A/cs receivable, inventory, and real property and equipment are the most commonly used types of collateral for commercial and industrial loans. The maximum amount that national banks can lend to any customer is limited to 25% of their equity capital. Most banks will not risk too much on one customer. The amount that they will loan depends on their size, geographic location, and the risk they are willing to face. Some of these limits of other are explained in a bank’s written loan policies. The Board of Directors of the bank, which has the ultimate responsibility for all loans that are made, acts as a guideline for those involved in the lending process. 11. Overdraft An overdraft occurs when a check is written on uncollected funds. In other words, an overdraft is a facility which allows an individual to with draw funds from his checking a/c in excess of the credit balance. If a bank pays on a check written against uncollected balances, it is an unsecured loan. Some overdraft loan are written with prior permission of the bank, but most are not. In the latter case, overdraft loan can be for less than one day (daylight overdraft), such as when a check is written in the morning and the deposit to cover that check is not made until that afternoon, or for one or more days. The customer is charged interest only on the amount he uses and the rate of interest is calculated daily on the prime rate. Normally no regular repayment is set. The customer can repay any amount at any time simply by paying money. 12. The growth òf bank credit In recent years, lending associated bank credit cards has been the fastest growth area in consumer lending. Bank credit cards first became popular nearly 30 years ago. At that time, individual banks issued the cards to their existing customers and recruited local retailers who agreed to accept them from the customers. Participating retailers daily presented the bank with sales vouchers signed by their card-using customers. The retailer’s bank a/cs then received immediate credit, less the bank’s discount. This service provided benefits to all three parties: issuing bank, cardholder and retailer. The bank collected fee derived from discounting retailer’s sales vouchers and charged interest on cardholder outstanding balances. Cardholders enjoyed unquestionable credit from participating retailers, avoided the burden of carrying cash for large purchases, and were not worried about uncertain acceptance of written checks. Retailers expanded their sales appeal to a growing pool of cardholders. However, the local bank credit card had serious drawbacks. The card’s usefulness was restricted to a circle of participating retailers in the card bank’s market areas. Also, there was strong competition among local banks that issued credit cards. These drawbacks were overcome in the late 1960s when two national credit card authorities emerged to replace the local bank cards. 14, Types and uses of working capital Profitability is determined in part by the way in which a company manages its working capital. Basically there will be a drop in profits if working capital is raised without a corresponding rise in production. So one of the principal functions of financial management is to provide the correct amount of working capital at the right time and in the right place to realize the greatest return on investment. Working capital can initially be broken down into two types: permanent and temporary. Permanent working capital is tied up in keeping the business flowing throughout the year, while temporary working capital is needed from time to time to take account of seasonal, cyclical or unexpected fluctuations in the business. The latter type is usually serviced from an overdraft facility Both types of working capital have three major applications: firstly inventories, secondly debtors and finally cash. Inventories can be further divided into inventories of raw materials, work in progress and finished goods. There three can soak up an enormous amount of excess working capital if not well managed. It is the job of the financial manager to minimize the stocks of raw materials, the level of work in progress and the quantity of finished goods. However, over-stringent control can lead to disruption in production caused by the delay in receiving raw materials, a failure to take account of costly price rises in the pipeline, a failure to keep the production volume required by future sales, and resulting expensive and damaging effects on customer goodwill. As one can see from the foregoing diagram, this can become a vicious circle where the loss of goodwill finally leads to loss of sales and results once again in stringent cost controls The just-in-time philosophy, developed in Japan, is aimed at reconciling these often conflicting interest and keeping inventory cost to a minimum. On the debtor side, working capital is required to finance the gap between payment due to suppliers and payment owed by customers. It is the task of financial management to see that generous credit terms are negotiated with suppliers but minimal credit is offered to customers. Again a balance must be achieved between getting and giving good credit terms in order to attract customers and maintain relationship with suppliers on one hand, and minimizing cash outlay on the other hand. Finally, cash is needed for both normal and abnormal requirements. Sound cash management will ensure that adequate cash is available for meeting the company’s day- to-day debts and there is also a small reserve on hand to meet contingencies. . sold for money, and that money is in turn exchanged for our goods and services. Coins are adequate for small transactions while paper notes are used for. fill in an a/c opening application form and to deposit some money. An a/c can be opened for individuals or a company. The former is the personal while the