The business of receiving, safeguarding and lending of money is called banking. In general, people who have some spare money, do not keep it with them to avoid the risk of losing it by theft, etc. They deposit this spare money in a bank. In the bank, the money is safe as well as it fetches interest on it. On the other hand, some people need money to start a business or to expand their business. So they borrow money from the bank at a nominal interest on the money borrowed from the bank. Thus, a bank is an institution which carries on the business of taking deposits and lending money. The rate of interest charged by the bank from its borrowers is usually higher than what it pays to depositors.
Types of Accounts:
The four different types of accounts provided by banks are as follows:
Current Account
In banking terminology, the term Current Account refers to a type of deposit account made with a financial institution that permits the withdrawal of funds and allows checks to be written against the balance.
A Current Bank Account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as a Demand Deposit Account. A current account can be opened in a co-operative bank or a commercial bank. In Current Account, money can be deposited and withdrawn at any time without giving any notice or penalty. This is the reason why most current accounts do not pay interest on the funds deposited in them. The customers are allowed to withdraw the amount with cheques. Cheques received from customers can be deposited in this account for collection.
A Current Account will often be used by individuals, businesses and financial institutions around the world as a means of keeping liquid funds available for making necessary payments and withdrawals. In the retail market, a Current Account is a relatively safe investment when opened with an insured and regulated financial institution like a bank, building society, savings and loan corporation, or credit union. In India, current account can be opened by depositing Rs.5000 (approx. US $ 100) to Rs. 25,000 (approx. US $ 500).
Fixed Deposit Account
In deposit terminology, the term Fixed Deposit Account refers to a type of savings account or certificate of deposit where deposits are made for a specified period of time and that pay out a fixed rate of interest, i.e., the account which is opened for a particular(fixed) period(time) by depositing a particular amount(money) is known as a Fixed(Term) Deposit Account. The term ‘fixed deposit’ means that the deposit is fixed and is repayable only after a specific period is over. Under fixed deposit account, money is deposited for a fixed period say six months, one year, five years or even ten years. The money deposited in this account can not be withdrawn before the expiry of period. The rate of interest paid for fixed deposits changes according to amount, period and from bank to bank.
A Fixed Deposit Accounts require that the funds be left in the account until the maturity date, incurring penalties for early withdrawal. These types of accounts are ideal as a store of wealth for individuals, businesses and financial institutions, earning a higher rate of interest on liquid assets than regular savings and checking accounts. The term Fixed Deposit is used in India and Southeast Asia and its equivalent in the United States is Time Deposit or CD, while in the United Kingdom the equivalent term is a Bond, and in Australia and Canada the investment product is known as a Term Deposit.
Saving Account
As suggested by the name itself, this account is to encourage the habit of savings among the people. This account can be opened in any bank with a suitable amount of money. After opening the account, the account holder can go on depositing money into his/her account at his/her convenience. He/she can also withdraw money from his/her account whenever required. The bank pays a certain rate of interest on the money kept in this account. The rate of interest on a savings bank account keeps changing from time to time and is compounded yearly or half-yearly according to the rules of different banks.
On opening an account, every person gets a pass-book issued by the bank. This pass book is held by the depositor in which date-wise entries regarding the deposits, withdrawals, balances and the interest earned are recorded by the bank.
In general, the format of a savings bank account pass-book is shown below:
| Date | Particulars | Amount Withdrawn | Amount Deposited | Balance | Initials | |||
| Rs | p | Rs | p | Rs | p | |||
Interest Calculation
In a saving bank account, the minimum balance after the 10th day upto the last day of the month qualifies as principal for the interest of that month.
For a given period of time, the interest is calculated as under:
1. Find the minimum balance after the 10th day and upto the last day of each month. This minimum balance so obtained works as the principal for the month.
2. Add all the principal amounts, obtained for different months of the particular period under consideration.
3. Calculate the simple interest on the sum, obtained in step (2) above, for one month at the rate prevailing at that time.
Though the interest is computed month-wise, but it is usually credited to the account every six months. This compounding (crediting) time may be one year or one month or three months as per the rules of different banks.
A savings bank account may also be opened with a Post Office. The rate of interest paid by the Post Office is usually 0.5% more than that paid by a bank.
Illustrative Examples
Example 1: Mr. Sharma has a savings bank account with Bank of India. A part of the page of his pass-book is shown below:
| Date | Particulars | Amount Withdrawn(Rs.) | Amount Deposited(Rs.) | Balance (Rs.) |
| July 1, 98 | B/F | 1500.00 | ||
| July 8, 98 | By Cheque | 1200.00 | 2700.00 | |
| July 23, 98 | By Cash | 800.00 | 3500.00 | |
| Aug. 17, 98 | To Cheque | 1600.00 | 1900.00 | |
| Aug. 27, 98 | By Cash | 600.00 | 2500.00 |
Find the amounts on which he will get interest for the months of July, 98 and Aug, 98.
Note: B/F stands for ‘brought forward’ from the previous page of the passbook.
Solution:
Since, the minimum balance after 10th July, 98 and up to the last day of July, 98 is Rs 2700.
So, the amount on which Mr. Sharma will earn interest for the month of July, 98= Rs 2700.00
Similarly, it is clear from the passbook that the minimum amount to Mr. Sharma’s credit after 10th August, 98 and up to the last day of August, 98 is Rs 1900.
So, the amount on which he will earn interest for the month of Aug., 98= Rs 1900.00
Example 2: Ashok holds a savings bank account in a bank. The following entries are recorded on a page of his passbook:
| Date | Particulars | Amount Withdrawn | Amount Deposited | Balance | |||
| Rs | p | Rs | p | Rs | p | ||
| April 1 | By Cash | 600 | 00 | 600 | 00 | ||
| April 6 | By Cash | 850 | 00 | 1450 | 00 | ||
| April 18 | By Cheque | 550 | 00 | 2000 | 00 | ||
| April 25 | To Cheque | 800 | 00 | 1200 | 00 | ||
| May 23 | To Cash | 400 | 00 | 800 | 00 | ||
| May 30 | By Cash | 1200 | 00 | 2000 | 00 | ||
Calculate the interest earned by Ashok for the months of April and May (from 1st April to 31st May) at the rate of 5% per annum.
Solution:
Since, the minimum amount after 10th April and up to the last date of April is Rs 1200.00
Therefore, Principal for the month of April= Rs 1200.00
Similarly, principal for the month of May= Rs 800.00
Therefore, Total principal= Rs (1200.00+800.00) = Rs 2000.00
Now, instead of calculating the interest for the month of April on Rs 1200.00 and for the month of May on Rs 800.00, we calculate the interest for one month on Rs 2000.00.
Thus, principal (P) =Rs 2000.00, time (T) =1 month=
Therefore, Interest
Example 3: Divya opened a savings bank account in a bank on 16th October. Her passbook has the following entries:
| Date | Particulars | Amount Withdrawn(Rs.) | Amount Deposited(Rs.) | Balance(Rs.) |
| Oct. 16 | By Cash | 700.00 | 700.00 | |
| Oct. 25 | By Cheque | 800.00 | 1500.00 | |
| Nov. 5 | To Cheque | 300.00 | 1200.00 | |
| Nov. 10 | By Cash | 1300.00 | 2500.00 | |
| Nov. 18 | To Cash | 900.00 | 1600.00 | |
| Dec. 3 | To cash | 400.00 | 1200.00 | |
| Dec. 21 | By Cheque | 1500.00 | 2700.00 | |
| Jan. 5 | By Cash | 300.00 | 3000.00 |
Divya closes the account on 18th January. Calculate the interest earned by her at 5% per annum.
Solution:
Divya opened her account on 16th Oct.
So, she had no money to her credit between 10th Oct. and 16th Oct.
Therefore, minimum amount to her credit after 10th Oct. and up to the last date in October is Rs 00.
Principal for the month of October=Rs 00
Similarly, principal for the month of November=Rs 1600.00
And, principal for the month of December=Rs 1200.00
Therefore, total principal=Rs (1600+1200) = Rs 2800
She will not get any interest for the month of January as she does not keep her account in the bank for the whole of January.
Now, for the interest; P=Rs 2800, T=1 month=
Therefore, Interest
Recurring Deposit Account (R.D. Account)
Under this scheme, an investor deposits a fixed amount every month for a specified number of months and on expiry of this period (called maturity period) he gets the amount deposited by him together with the interest due to him. The amount received by the investor on the expiry of the specified period is called maturity value.
RD Interest Calculation
Suppose Rs P per month is deposited each month for n months at R% p.a.
Then, Rs P deposited in the nth month will earn interest for 1 month; that deposited in (n-1)th month will earn interest for 2 months, and so on; while the sum deposited in the first month will earn interest for n months.
Thus, we have:
Equivalent principal for one month
![=Rs \: [P \times (1+2+...+n)]=Rs \: [P \times \dfrac{n(n+1)}{2}]](https://s0.wp.com/latex.php?latex=%3DRs+%5C%3A+%5BP+%5Ctimes+%281%2B2%2B...%2Bn%29%5D%3DRs+%5C%3A+%5BP+%5Ctimes+%5Cdfrac%7Bn%28n%2B1%29%7D%7B2%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
Thus, the interest can be calculated using the formula:
![S.I.= Rs \: [P \times \dfrac{n(n+1)}{2} \times \dfrac{1}{12} \times \dfrac{R}{100}]](https://s0.wp.com/latex.php?latex=S.I.%3D+Rs+%5C%3A+%5BP+%5Ctimes+%5Cdfrac%7Bn%28n%2B1%29%7D%7B2%7D+%5Ctimes+%5Cdfrac%7B1%7D%7B12%7D+%5Ctimes+%5Cdfrac%7BR%7D%7B100%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
Illustrative Examples:
Example 1: Arun deposited Rs 150 per month in a bank for 8 months under the R.D. Scheme. What will be the maturity value of his deposits, if the rate of interest is 8% per annum and interest is calculated at the end of each month?
Solution:
Here
Then,
![S.I. =Rs \: [P \times \dfrac{n(n+1)}{2} \times \dfrac{1}{12} \times \dfrac{R}{100}]](https://s0.wp.com/latex.php?latex=S.I.+%3DRs+%5C%3A+%5BP+%5Ctimes+%5Cdfrac%7Bn%28n%2B1%29%7D%7B2%7D+%5Ctimes+%5Cdfrac%7B1%7D%7B12%7D+%5Ctimes+%5Cdfrac%7BR%7D%7B100%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
![=Rs \: [150 \times \dfrac{8 \times 9}{2} \times \dfrac{1}{12} \times \dfrac{8}{100}]](https://s0.wp.com/latex.php?latex=%3DRs+%5C%3A+%5B150+%5Ctimes+%5Cdfrac%7B8+%5Ctimes+9%7D%7B2%7D+%5Ctimes+%5Cdfrac%7B1%7D%7B12%7D+%5Ctimes+%5Cdfrac%7B8%7D%7B100%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
So, Maturity value
![=Rs \: [(150 \times 8) + 36] = Rs \: 1236](https://s0.wp.com/latex.php?latex=%3DRs+%5C%3A+%5B%28150+%5Ctimes+8%29+%2B+36%5D+%3D+Rs+%5C%3A+1236+&bg=ffffff&fg=000&s=0&c=20201002)
Example 2: Meena has a R.D. account in Punjab National Bank and deposits Rs 400 per month for 3 years. If she gets Rs 16176 on maturity, find the rate of interest.
Solution:
Here
Then equivalent principal for 1 month
![=Rs \: [P \times \dfrac{n(n+1)}{2}]](https://s0.wp.com/latex.php?latex=%3DRs+%5C%3A+%5BP+%5Ctimes+%5Cdfrac%7Bn%28n%2B1%29%7D%7B2%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
![=Rs \: [400 \times \dfrac{36(36+1)}{2}]](https://s0.wp.com/latex.php?latex=%3DRs+%5C%3A+%5B400+%5Ctimes+%5Cdfrac%7B36%2836%2B1%29%7D%7B2%7D%5D+&bg=ffffff&fg=000&s=0&c=20201002)
And,
On solving, we get rate
Example 3: Mr. R.K. Nair gets Rs 6455 at the end of 1 year at the rate of 14% p.a. in a R.D. account. Find the monthly installment.
Solution:
Let
Then, equivalent principal for 12 months
The money deposited in 12 months
Maturity value
From the question,
Therefore, monthly installment=Rs 500.
Exercise
1. Given below are the entries in a savings bank A/c passbook:
| Date | Particulars | Withdrawal | Deposits | Balance |
| Feb. 8 | B\F | Rs. 8500 | ||
| Feb. 18 | To Self | RS. 4000 | ||
| April 12 | By Cash | Rs. 2238 | ||
| June 15 | To Self | Rs. 5000 | ||
| July 8 | By Cash | Rs. 6000 |
Calculate the interest for 6 months at % p.a. on the minimum balance on or after the 10th day of each month.
2. Shiv has a savings bank account in the Bank Of India. His passbook entries are as follows:
| Date | Particulars | Withdrawal | Deposits | Balance |
| April 1,97 | B/F | Rs 3220 | ||
| April 15 | By transfer | Rs 2010 | Rs 5230 | |
| May 8 | To Cheque no. 355 | Rs 298 | Rs 4932 | |
| July 15 | By clearing | Rs 4628 | Rs 9560 | |
| July 29 | By Cash | Rs 5440 | Rs 15000 | |
| Sept 10 | To Self | Rs 6980 | Rs 8020 | |
| Jan 10, 98 | By Cash | Rs 8000 | Rs 16020 |
Calculate the interest due to him at the end of the financial year (March 31st 1998) at the rate of 6% p.a.
3. Calculate simple interest at the rate of 6% p.a. upto June 30.
| Date | Debit(Rs.) | Credit(Rs.) | Balance(Rs) |
| Jan. 1 | 24000 | 24000 | |
| Jan. 20 | 5000 | 19000 | |
| Jan. 29 | 10000 | 29000 | |
| March 15 | 8000 | 37000 | |
| April 3 | 7653 | 44653 | |
| May 6 | 3040 | 41613 | |
| May 8 | 5087 | 46700 |
Also, find the interest if the account is closed on June 30.
4. Given the following details calculate the rate of interest paid by the bank on 31st Dec. 2006 if a person gets Rs 335 as interest at the end of the year when the interest is compounded annually.
| Date | Withdrawal(Rs.) | Deposit(Rs.) | Balance(Rs.) |
| 04.01.06 | 4800 | ||
| 09.01.06 | 2000 | 6800 | |
| 21.01.06 | 1600 | 5200 | |
| 10.02.06 | 3200 | 8400 | |
| 29.02.06 | 2000 | 6400 | |
| 30.02.06 | 2800 | 9200 | |
| 16.11.06 | 2400 | 6800 | |
| 02.12.06 | 1200 | 8000 |
5. Puneet has a R.D. account in the Bank of Baroda and deposits Rs. 140 p.m. for 4 years. If he gets Rs.8092 on maturity, find the rate of interest given by the bank.
6. Manish opens a R.D. account and deposits Rs 600 per month for 20 months. Calculate the maturity value of this account, if the rate of interest is 10% p.a.
7. Mr. Rao has a R.D. account for 3 years at 7% interest p.a. She receives Rs 7977 as the maturity amount after 3 years. Find
- The monthly deposit.
- The total interest earned.
8. An R.D. account of Rs. 1200 per month has a maturity value of Rs. 12440. If the rate of interest is 8% and the interest is calculated at the end of every moth find the time (in months) of the R.D. account.