Understanding Banking Transactions: Assets, Liabilities, and Services
Understanding Banking Transactions
Classify the following financial transactions according to whether they are asset, liability, or neutral.
Credit account: asset
Direct debit of a telephone bill: neutral
Deposit of a cheque: neutral
Collection management of bills of exchange: neutral
Bank transfer: neutral
Loan: asset
Fixed-term deposit: liability
Leasing: asset
Factoring: asset
Savings account: liability
Currency exchange: neutral
Taking effects for your discount: asset
Differences Between Liability and Asset Banking Operations
Liability transactions are those carried out by banks by attracting financial resources from their customers through deposits of money, obliging them to return the amounts received in exchange plus a remuneration.
Asset banking operations are those carried out by financial institutions by making financial resources available to their customers.
What is a Current Account?
The current account is a deposit that allows the financial institution to deposit money in exchange for the obligation to return it immediately when the customer requests it.
What is the IBAN?
The IBAN (International Bank Account Number) is the international code that identifies a bank account. It was created to facilitate cross-border transactions among the banks of the European Union, ensuring data accuracy and speed.
What is a Fixed Term Deposit?
It is the money we have given to the institution to make up a deposit, is not subjected to fluctuations, and it is usually remunerated at a fixed interest rate, although it may also be remunerated in kind.
Guarantees: Personal vs. Real
You can use guarantees, once the asset transaction has been analyzed, if the financial institution decides to grant it, it may require further guarantees.
Personal guarantees: This is called a personal guarantee because it does not take into account any specific asset that acts as a payment guarantee.
Real guarantees: These are those transactions that are secured, in addition to the assets of the client and guarantors, with a preferential right over a specific asset.
What is a Bank Loan?
A bank loan is a financial operation in which a financial institution (lender) delivers to the customer (borrower) a fixed amount of money at the beginning of the operation, on the condition that the borrower pays back this amount in one or more terms together with the agreed interest and commissions.
Fixed vs. Variable Interest Rates
Fixed: If it remains constant throughout the life of the loan.
Variable: It varies throughout the loan, adapting to the circumstances of the money market.
Loan vs. Credit Account
Loan
– Duration: long term
– Amount: the customer takes all the money
– Costs associated:
Credit account
– Duration: usually short-term, maximum 1 year
– Amount: is available up to a limit, the customer takes the money as needed
– Costs associated:
What is a Bank Guarantee?
The bank guarantee is the contract by which a financial institution (guarantor) undertakes to be liable for the economic obligations contracted by another towards a third party (beneficiary), in the event that the customer fails to do so.
Leasing vs. Renting
Leasing
– Duration: minimum 2 years
– Subjects of the contracts: companies and self-employed
– Purchase option: yes
Renting
– Duration: between 1 and 5 years
– Subjects of the contracts: companies, self-employed, and individuals
– Purchase option: no
Factoring vs. Confirming
Factoring: Consists of the assignment of a company’s trade credits, for a specific price, to a financial institution to take care of their collection.
Confirming: It is a contract through which a financial institution makes payments from a company to its suppliers.
Name 5 Banking Services
Electronic banking
Direct debits
Transfer
Bank guarantee
Safe deposit box rental
15. A) Credit account