What It Means
A checking account is an account that an individual establishes at a financial institution in order to pay monthly expenses and to purchase goods and services. When a person opens a checking account, he or she receives a checkbook and a ledger to record the funds released from and deposited into the account and the amount of money remaining in the account. A checkbook contains a series of checks, or small rectangular pieces of paper, printed on which are the account holder’s name, address, and account number; the banking institution’s name; and a series of blank lines. The account holder writes instructions on these lines authorizing the financial institution to release from the checking account a specified amount of money to designated individuals, businesses, or other organizations.
For example, a person who is charged $92 for a furnace repair by a repair person may pay the bill with a check rather than with cash. To pay with a check, the person removes a check from the checkbook and writes the following information on it: the day’s date; the name of the institution or individual authorized to receive the funds from the account; the amount in dollars and cents that the institution or individual may receive from the account; and his signature as the account holder, which verifies that he releases the funds to the designated institution or individual. The repair person will then have the option of taking the check to his banking institution, to the customer’s banking institution, or possibly to a third party to cash the check (receive the funds specified on the check). When the repair person cashes the check, the money will be withdrawn, or subtracted, from the customer’s checking account.
When Did It Begin?
The first paper money issued by the Chinese in the seventh century ad functioned in much the same way that a check does today. Back then, Chinese currency consisted of brass, iron, and copper coins with holes in the middle. The Chinese would run a string through the holes to make larger denominations of money, but carrying these weighty metals became inconvenient and dangerous. To eliminate the burden of carrying these coins, the Chinese began storing their money with a trusted individual in exchange for a note stating how many coins were held in storage. Gradually, people began to purchase goods and services with these notes instead of offering coins at the point of sale. If a person bought an item with a note, the seller could then take the note to the place where the coins were stored and retrieve the coins. If the seller did not wish to carry the coins on his person, he could request that the coins now be stored on his behalf, rather than on behalf of the previous owner of the coins. Or, if he chose, the seller could take the coins and store them with another trusted individual. The individuals who stored money for merchants and consumers were performing a service similar to modern banks. The notes used as a means of exchange resembled modern checks because a person could cash or redeem these notes the way people today cash checks.
More Detailed Information
There are two important differences between a checking account and a savings account. The first difference is the purpose of each type of account. In most cases, a person opens a savings account to hold or accumulate funds he or she intends to store for a period of time, rather than spend. People may establish a savings account in order to one day purchase a large item, such as a car or a house. Some people store money in a savings account in case they lose their job or source of income. If such an event were to occur, a person could immediately withdraw the money or transfer it into his or her checking account without paying the bank a fee. (Other forms of investment, such as mutual funds and retirement funds, charge significant penalties if funds are withdrawn before a prearranged date.) The purpose of a checking account, on the other hand, is not to store and accumulate funds, but rather to pay for regular expenses, such as phone bills and car payments.
The second difference between a checking and a savings account is that savings accounts pay interest and most checking accounts do not. The interest on a savings account is a small fee that the bank pays an individual for storing his or her money in that institution. For example, if a savings account pays 3 percent interest, this means that at certain specified times of the year, the bank will add 3 percent to the sum, or balance, in the client’s account. Interest allows the balance in the savings account to grow even if the customer does not deposit additional funds. Until the 1930s it was illegal in the United States for a bank to pay interest on checking accounts. Now some checking accounts pay small amounts of interest, but they require an individual to maintain a specified minimum balance. For example, a bank may have a type of checking account called a “preferred checking account” or an “advantage checking account” that pays 0.5 percent interest if the client maintains a minimum balance of $1,500. According to this agreement, if the client is to receive the interest, then the account must have at least $1,500 on the date that the bank is scheduled to pay the interest.
Anyone who has a checking account must be careful to track the funds that are deposited into the account and withdrawn from it. This is called balancing the account, or balancing the checkbook. A person balances an account in a ledger or transaction register by adding all deposits to the total sum in the account and subtracting the value of each check from the total in the account. For example, if there is $200 in an account and a check is written for $95, then the account holder should subtract $95 from $200 and note that $105 remains in the account. Maintaining accurate records will prevent an overdraft, or writing a check for an amount greater than the balance of the account. For example, if the person with $105 in his account wrote another check for $150, then the $150 check is an overdraft. The account holder would receive a notification from his bank informing him that the check could not be cashed because there were insufficient funds in the account. The account holder would have to pay a penalty for “bouncing” the check. To prevent this, some people have checking accounts with overdraft protection. If a person with overdraft protection overdraws his or her checking account, the bank will automatically draw the insufficient funds either from the person’s savings account or charge those funds to his credit card.
Since the turn of the millennium more people have begun using new technology to purchase goods and services and to pay their bills. Rather than write a check or pay cash, many people purchase goods with a debit card, which is a plastic card that resembles a credit card but operates like a check. In order to conduct a transaction with a debit card, either the merchant or the customer swipes the card through a computer terminal. The computer then reads the banking information encoded in a strip on the card and verifies with the customer’s financial institution that the customer has enough money in his or her account to pay for the merchandise. If the account has sufficient funds, then the customer is asked to verify the purchase price for the goods. Depending on the merchant’s computer system, the customer is asked to verify the transaction in one of two ways: either by entering his personal four-digit code number (known as a PIN, or personal identification number) or by signing a sales receipt. According to some estimates, U.S. shoppers made approximately one-third of their purchases in 2006 with a debit card.
Instead of writing checks to pay monthly bills, many Americans make arrangements to have funds automatically withdrawn from their checking accounts each month. For example, a person can give permission to the energy company to withdraw funds from his or her account to pay for the monthly heating bill. Similar arrangements can be made for the phone bill, the cable-television bill, and mortgage and car payments. Instead of writing these withdrawals in a traditional checkbook, the individual can verify the status of his or her account by visiting the bank’s website and logging in to his or her account with a username and password.
"Checking Account." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Encyclopedia.com. (September 19, 2018). http://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/checking-account
"Checking Account." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. . Retrieved September 19, 2018 from Encyclopedia.com: http://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/checking-account
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