Essential Banking Terms and Definitions

Posted on Mar 25, 2025 in Business Administration and Innovation Management

Essential Banking Terms and Definitions

Internal and External Controls

  1. Internal Controls: Procedures within the business that are designed to protect cash and other assets and to keep reliable records.
  2. External Controls: Measures and procedures provided outside the business to protect cash and other assets.

Checking Account Fundamentals

  1. Checking Account: An account that allows a person or business to deposit cash in a bank and then write checks, make ATM withdrawals, and make debit card purchases against the account balance.
  2. Check: A written order from a depositor telling the bank to pay a stated amount of cash to the person or business named on the check.
  3. Depositor: A person or business that has cash on deposit in a bank.
  4. Signature Card: A bank form containing the signature of the person authorized to write checks on a checking account.
  5. Deposit Slip: A bank form used to list the cash and checks to be deposited.

Check Endorsements

  1. Endorsement: An authorized signature written or stamped on the back of a check that transfers ownership of the check.
  2. Blank Endorsement: A check endorsement that includes only the signature or stamp of the depositor. It does not specify the new owner of the check.
  3. Special Endorsement: A check endorsement that transfers ownership of the check to a specific individual or business.
  4. Restrictive Endorsement: A check endorsement that transfers ownership to a specific owner and limits how the check may be handled (e.g., “For Deposit Only”).

Parties Involved in a Check

  1. Payee: The person or business to whom a check is written or a note is payable.
  2. Drawer: The person who signs a check.
  3. Drawee: The bank on which a check is written.

Check Handling and Bank Statements

  1. Voiding a Check: Making a check unusable by writing the word “VOID” in ink across the front of the check.
  2. Bank Statement: An itemized record of all the transactions in a depositor’s account over a given period, usually a month.
  3. Canceled Check: A check paid by the bank, deducted from the depositor’s account, and returned with the bank statement to the account holder.
  4. Imaged Check: A copy of a canceled check (also called a substitute check); it is sent with the bank statement in place of the original canceled check.
  5. Reconciling the Bank Statement: The process of determining any differences between a bank statement balance and a checkbook balance.
  6. Outstanding Check: A check that has been written but has not yet been presented to the bank for payment.
  7. Outstanding Deposit: A deposit that has been made and recorded in the checkbook but does not yet appear on the bank statement.
  8. Bank Service Charge: A fee the bank charges for maintaining bank records and processing bank statement items for the depositor.
  9. Stop Payment Order: A demand by the drawer, usually in writing, that the bank not honor a specific check.
  10. NSF Check: A check returned to the depositor by the bank because the drawer’s checking account does not have sufficient funds to cover the amount; also called a dishonored or bounced check.

Modern Banking Practices

  1. Check 21 (Check Clearing for the 21st Century Act): Allows for an electronic image to be quickly processed between banks.
  2. Postdated Check: A check that has a future date instead of the actual date; it should not be deposited until the date on the check.
  3. Electronic Funds Transfer System (EFTS): A system that allows banks to transfer funds among accounts quickly and accurately without the exchange of checks.
  4. Bank Card: A bank-issued card honored by many businesses that can be used to withdraw cash and to make payments for goods and services at many businesses instead of writing checks.
  5. Automated Teller Machine (ATM): A computer terminal where account holders can conduct various banking activities, often outside the bank or at other locations.

Questions

7. Explain how to properly write a check. Why should it be written in ink, typewritten, computer or check-writing machine?

A: Some businesses use a check-writing machine that perforates the amount of the check in words on the dollars line. Write checks in ink, or prepare typewritten or computer-generated checks.

9. Describe how to reconcile a bank statement.

A: It is a good way to ensure orderly cash records and guard against cash losses. The bank expects to be notified immediately of any errors on the statement. Failure to do so may release the bank from responsibility for the errors.