Depositing money with a bank

There are two general reasons for using a bank account. The first and most common are the convenience and safety provided by a current account at a bank. The second is that small and perhaps regular surpluses are available to be saved, and for this purpose a bank provides deposit accounts.

A deposit account will not offer a high rate of interest and would not be the best way to save large sums of money for any long period of time, but it is designed to make saving simple, convenient and safe. It is especially appropriate for those who may save small amounts from time to time without any planned regularity or for those who wish to save for a particular purpose in the immediate future, for example, for annual holidays or for the purchase of a major item such as a car.

Most customers of a bank who have opened a deposit account will also have a current account and this makes the transfer of amounts of money from one to the other an easy matter. Regular payments into a deposit account can be made through a standing order to the bank that will automatically transfer the agreed amount according to your instructions. Other payments are made on standard forms but it is most convenient and provides a useful record if the depositor uses a paying in book. Interest is calculated every six months and added to the account. The rate of interest varies from time to time and is publicly advertised in any bank. Because the bank uses money deposited with them to lend to others it normally requires about seven days notice of intention to withdraw money from a deposit account, but unless there is a heavy demand for money they are not likely to insist on this and cash is often immediately available to those who wish to withdraw it. There is an assumption that if such notice was given, you would lose seven days interest on the money.

The increasing need for security and the use of computers in wage payments have combined to make it more common to have a bank account than to be without one. This kind of account is a current one and its most common use is a single regular payment in either a weekly wage or a monthly salary and regular payments out to meet the normal everyday expenses. Most payments are still made by cheques although the use of the standing order or the direct debit is becoming very common. It is normally expected that a current account will remain in balance and customers who regularly maintain an agreed minimum balance are often given the services of the bank without charge. In general, however, charges are made which vary with the size of the balance, the amount of use of the bank's services and the number of transactions. If the account is overdrawn a further charge, which is interest on the overdrawn amount, is also made. Overdrafts are not permitted automatically and anything other than a small temporary overdraft would have to be by agreement with the bank manager. Such a facility is often useful particularly when there is a short term disbalance between income and expenditure. On the other hand, since money in a current account does not attract interest, it is not a good idea to maintain large cash balances; these would be better transferred to a deposit account or to an alternative form of saving.

Vocabulary:

rate of interest – відсоткова ставка

appropriate – належний, відповідний

immediate future – найближче майбутнє

annual – щорічний

item – предмет, найменування товару

easy matter – легка справа

standing order – постійне платіжне доручення

to add – додавати

to withdraw money – знімати гроші з рахунку

available – наявний, доступний

assumption – припущення

direct debit – списання у безакцептному порядку; дебатування рахунку покупця постачальниками

to overdraw (overdrawn; overdrawn) – зняти з рахунку суму, що перевищує залишок на рахунку

Questions:

1. What are the general reasons for using a bank account?

2. What are the peculiarities of a deposit account?

3. What does a current account offer?

4. What does the rate of interest depend on?

5. How are the payments usually made? What are the alternative ways of payments?

6. What is an overdraft? When is it permitted?

FINANCIAL ACCOUNTING

Financial accounting differs from managerial accounting because the information and analyses are for people outside the organization. This information goes to owners and prospective owners, creditors and lenders, employee unions, customers, suppliers, governmental units, and the general public. These external users are interested in the organization’s profits, its ability to pay its bills, and other financial information. Much of the information is contained in the annual report, a yearly statement of the financial condition and progress of the organization. Various quarterly reports keep the users more current. Financial accounting reports answer such questions as the following:

· Has the company’s income been satisfactory? Should we invest in this company?

· Should we loan money to this company? Will it be able to pay the money back?

· Can the company afford to raise its salaries? Is it financially strong enough to provide permanent employment?

· Is the company financially strong enough to stay in business to honor product warranties?

We hope you are getting the idea that accounting is critical to business and to anyone who wants to understand business. If so, you may want to know more about accounting firms, who the people are, who prepares these reports, and how you can be sure that they know what they are doing. You may even become interested in an accounting career. Traditionally, such careers have been paid well and usually only good students apply for such vacancies.

Vocabulary:

lender – кредитор

general public – широкий загал

annual report – щорічний звіт

quarterly report – квартальний звіт

satisfactory – задовільний

permanent employment – постійна зайнятість

warrantу – (технічна) гарантія

Questions:

1. How does financial accounting differ from managerial accounting?

2. What are the external users interested in?

3. What questions do financial accounting reports answer?

4. What is the general idea of accounting? Is it critical to business?

FUNCTIONS OF MONEY

Whether money in shells or rocks or gold or paper, in any economy it has three primary functions, it is a medium of exchange, a unit of account, and a store of value. Of the three functions, its function as a medium of exchange is what distinguishes money from other assets such as stocks, bonds, or houses.

Medium of Exchange. In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; that is, it is used to pay for goods and services. The use of money as a medium of exchange promotes economic efficiency by eliminating much of the time spent in exchanging goods and services. To see why, let's look at a barter economy, one without money in which goods or services are exchanged directly for other goods or services. Take the case of Ellen, the Economics professor, who can do just one thing well: give brilliant economic lectures. In a barter economy, if Ellen wants to eat, she must find a farmer who not only produces the food she likes, but also wants to learn economics. As you might expect, this search will be difficult and time consuming, and Ellen may spend more time looking for such an economics-hungry farmer than she will teaching. It is even possible that she will have to quit lecturing and go into farming herself. Even so, she may still starve to death.

The time spent trying to exchange goods and services is called transactions cost. In a barter economy, transactions costs are high because people have to satisfy a double coincidence of wants: that is, they have to find someone who has a good or service they want and who also wants the good or service they have to offer.

We see money promotes economic efficiency by eliminating much of the time spent exchanging goods and services. It also promotes efficiency by allowing people to specialize in what they do best. We see, therefore, that money is an essential item in an economy. It acts as a lubricant that allows the economy to run more smoothly by lowering transactions costs, thereby encouraging specialization and the division of labor.

The need for money is so strong that almost every society except the most primitive invents it. For a commodity to functionas effectively as money it has to meet several criteria: (1) it must be easily standardized, making it simple to ascertain its value; (2) it must be widely accepted; (3) it must be divisible so that is easy to "make change"; (4) it must be easy to carry, and (5) it must not deteriorate quickly. Forms of money that have satisfied these criteria have taken many unusual forms throughout human history.

Vocabulary:

medium of exchange – засіб обміну

store – збереження

to distinguish – відрізняти

to promote – сприяти

to eliminate – усувати

brilliant – чудовий, яскравий

search – пошук

time consuming – той, що забирає багато часу

to quit – звільнятися

to starve – голодувати

coincidence – співпадіння

lubricant – мастило

commodity – товар

to ascertain – встановити

divisible – ділимий

to deteriorate – пошкоджуватися, зношуватися

criteria (sing. criterion) – критерії

Questions:

1. How many functions of money do you know?

2. What function of money is the most important?

3. What is money as a medium of exchange used for?

4. What do we call a transaction cost?

5. How does money promote economic efficiency?

6. What are the criteria for money?

FINANCIAL MARKETS

To answer the questions of what, how and for whom toproduce we look at three major financial markets: the stock market, the bond market and the futures market (where everything from frozen pork bellies to U.S. Treasury bonds are traded).

Stock markets are one of the institutions that serve as financial intermediaries. Stock markets help channel savings into investment. Although most people immediately think of Wall Street when they hear “stock exchanges” the stock market is highly dispersed. There are 17 different stock exchanges in the United States and over a hundred additional exchanges in other countries.

What people buy and sell on the stock exchanges are ownership shares of corporations. A corporation tends to be the largest type of enterprise, with average asset values measured in millions of dollars.

The ownership of corporation is defined in terms of stock shares. Each share of corporate stock represents partial ownership of the business. People holding shares of corporations hope to realize a financial gain from these assets. As part owners, shareholders are entitled to any profits the corporation makes.

Shareholders do not necessarily receive their share of the company's profit in cash. The corporation may choose to retain earnings or pay them out to shareholders as dividends. There are two motivations for buying and holding stocks — the expectation of dividends and anticipated capital gains.

Stock prices depend upon demand and supply in financial markets. If demand for the stock increases the stock's price will tend to rise. Similarly, an increasing reluctance of owners to sell would push the stock's price higher.

The bond market operates much like the stock market. The major difference is in the kind of paper traded. In the stock market people buy and sell shares of corporate ownership. In the bond market people buy and sell promissory notes («IOUs» — I owe you). A bond is a written promise to repay a loan. The borrower may be a corporation ("corporate bonds"), local governments ("municipal bonds”), the federal government ("treasury bonds”) and other institutions.

A bond is issued when an institution wants to borrow money. The company had great ideas but not enough resources to start production. Previously, the problem was solved by issuing stock. A second alternative for raising necessary funds is to borrow money. The advantage of borrowing funds is that we can keep control of the company. Lenders are not owners. On the other hand, if we borrow, we have to pay the lenders back, with interest.

Thus the bond market also functions as a financial intermediary transferring available savings (wealth) to those who want to acquire more resources (invest). The critical issue here is the “price” of the bond. At low rates of interest no one is willing to lend funds to the company. The increased willingness to lend funds is reflected in an increased demand for bonds. This increased demand will push up the price of the bond. As bond prices rise their implied effective interest rate (yield) falls.

In futures markets people buy and sell things that are to be “delivered” in the future at prices agreed on today. Futures markets make life easier for the farmer and consumer.

To summarize: The central purpose of financial markets is to help channel the savings of consumers and businesses into productive investments.

Vocabulary:

stock market – ринок капіталу, фондова біржа

bond market – ринок облігацій, ринок довго-строкового капіталу

bond – облігація, боргове зобов’язання

futures market – ф’ючерсний ринок

financial intermediary – фінансовий посередник

exchange – обмін; біржа; іноземна валюта

corporation –корпорація, акціонерне товариство

corporate stock – акціонерний капітал

shareholder – акціонер

dividend – дивіденд