ESSENTIAL STANDARD 4.00

Understand the role of finance in business

OBJECTIVE 4.02Understand the banking system.

TOPICS

Classification of financial institutions Common payment services Federal Reserve System

CLASSIFICATION OF FINANCIAL INSTITUTIONS

CLASSIFICATION OF FINANCIAL INSTITUTIONS Depository

Earns money to finance their business by accepting deposits from customers

Types include: Commercial banks, which offer many different

services, including savings, loans, and checking accounts.

Savings and loan associations (S&Ls), which traditionally specialize in savings and home loans, but now are very similar to commercial banks.

Mutual savings banks, which are owned by the depositors and specialize in savings and home loans.

Credit unions, which are not-for profit, serve their members only, and are owned by their depositors.

CLASSIFICATION OF FINANCIAL INSTITUTIONS CONTINUED Non-depository

Earns money to finance their business by selling specific services such as policies, investments, and loans

Types include: Life insurance companies Investment companies Consumer finance companies Mortgage companies Check-cashing outlets Pawnshops

CLASSIFICATION OF FINANCIAL INSTITUTIONS CONTINUED Which characteristics of financial institutions are

used for comparing them? Services –Does the institution offer savings,

checking, loans, credit cards, safe deposit boxes, trusts, etc?

Safety – Does the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insure the institution against losses?

Convenience – Does the institution offer the access you desire?

Fees and Charges – What are the short and long-term costs of the services?

Restrictions – Are there minimum balances that must be kept, or other restrictions?

What kinds of questions may be asked about each characteristic?

COMMON PAYMENT SERVICES

COMMON PAYMENT SERVICES Opening a checking account

Signing a signature card is the first step Endorsing a check for deposit An endorsement allows the payee to cash the

check, deposit the check or transfer payment of the check to someone else.

Different types of endorsements: Blank Full Restrictive

BLANK ENDORSEMENT

Consists of endorser’s name only

Anyone who has a check with a blank endorsement may cash it.

SPECIAL ENDORSEMENT

Transfers payment of a check to someone else.

Can be used to make payment on a debt

Juan Delgado is the payee on this check.

RESTRICTIVE ENDORSEMENT Limits use of the check

so it can be deposited only to endorser’s account.

Safest type of endorsement, as it cannot be cashed by a thief or someone who finds the check.

Safest endorsement to use when mailing a check for deposit or when using the ATM for deposit.

CHECK WRITING PROCEDURES

1. Ensure all information is written in the check register first, and ensure checks are written in numerical order.

2. Write the date the check is written.

3. Write the payee’s name.

CHECK WRITING PROCEDURES CONTINUED

5. Write in the numerical amount of the check.

6. Write in the amount of the check in words.7. Write in the purpose of the check.8. Sign the check.

BANK RECONCILIATION

What is a bank reconciliation? A bank reconciliation is the document created to

show how the two balances (your own record of your checking account and the bank’s record of your account) were brought into agreement.

What is an outstanding check? Outstanding checks are checks that have not been

deducted from the bank statement balance

STEPS IN A BANK RECONCILIATION

1. Obtain the monthly bank statement.2. Determine checks paid.3. Find differences between the monthly bank

statement and monthly check register.4. Calculate the adjusted balance.5. If the balances do not agree, check the

steps again and recalculate.

THE FEDERAL RESERVE SYSTEM

THE FEDERAL RESERVE SYSTEM

What is the Federal Reserve System? The Federal Reserve (Fed) is a centralized banking

system Why does it exist?

The Fed exists to supervise and regulate member banks and help serve the public efficiently.

Who participates? All national banks are required to be members of the

Fed; state banks have the option of joining. How is it organized?

The Fed has 12 districts

THE FEDERAL RESERVE SYSTEM CONTINUED

Services provided by the Fed: Supervision of banks Participation of open market activities Acting as a clearinghouse Holding reserves Approving bank mergers Supplying paper currency Managing the discount rate

ANATOMY OF A CHECK

KEYName – name and address of the person who writes the check.

Amount of check in words – this helps to avoid confusion or illegible writing

Date check is written – to aid with bank reconciliations.

Amount of check in numbers – to avoid fraud, leave no space between the dollars and the cents

Check number – each check for each personal account has a unique number to aid in reconciliations and reduce fraud

Payee – the person to whom the check is written.

Purpose of check – why the check was written

Drawee – the financial institution that pays the check

Bank’s Routing Number – the number banks use to process the check.

Drawer’s account number – used to efficiently process checks.

Drawer’s signature – the person who writes the check signs here.