Demand Deposits Meaning Example Top 3 Types Of Demand Deposits

Demand Deposits Meaning

Top 3 Types of Demand Deposits

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Demand Deposits (wallstreetmojo.com)

#1 – Checking Accounts

Checking accounts are the most common and easy to use. It allows easy access to cash by withdrawing it anytime from ATMs, Bank’s Teller, Debit Cards, and writing checks provided by the bank. Also, checking accountsChecking AccountsA checking account is a bank account that allows multiple deposits and withdrawals. Additionally, it provides superior liquidity.read more do not pay any interest in most banks due to their pure on-demand nature.

Checking accounts helps in improving the short-term liquidity for small businesses by providing easy access to cash when needed due to working capital requirements.

#2 – Savings/Term Deposit Accounts

Savings/Term Deposit accounts are for a longer duration than a checking account. They offer lesser liquidity and more interest rates than a checking account. The drawback is that they do not offer any check writing facility, but users can withdraw funds through Bank’s Teller and online banking. Sometimes early withdrawal leads to some additional charges by many banks, but there is no charge to maintain these accounts.

You can easily transfer money from one deposit product to another as per your standing instructions to the bank. E.g., Banks such as Barclay’s issue term deposits to corporate customers known as Wholesale term deposits, whereas, when issued to retail customers, it is known as Retail Deposits. There are also sweep-in and sweep-out facilities in this product.

#3 – Money Market Accounts

Money market accountsMoney Market AccountsMoney Market Account is the account which receives all the interests from the instruments in the money market according to the agreed-upon terms. This account is separate from that of securities account, it only accounts for the proceeds.read more are based on market interest rates based upon macro variable factors as determined by the country’s central bank. As the interest rates fluctuate daily, it becomes unpredictable as sometimes it offers more interest than savings accounts and sometimes lesser. It also offers more or less the same other features as we discussed above for savings accounts. Banks generally do not charge any fee for maintaining this facility for their customers.

Example of Demand Deposit

John has a balance of £100,000 in his savings bank account as of August 1st. On August 15th, he received £200,000, and the proceeds of the Term Insurance policy amount matured. On August 25th, he withdrew a sum of £200,000 to renovate his house, thereby reducing his Savings Bank account balance to £100,000.

Assume that interest is calculated at 4% p.a. on his savings account on a daily product method.

From August 1st to 14th, he will be paid interest on £100,000 for 14 days.From 15th to 25th, interest calculation is on £300,000 for 10 days.For the remaining six days, interest calculation is on £50,000So, the interest he earns for the month of August will be £581 (rounded).

So, every rupee one keeps in a Savings Bank account earns interest, calculated on the daily product method. For February, the days will be either 28 or 29 days.

Advantages

Ease of access: Demand Deposits such as checking accounts always provide quick and easy access to the bank’s customer through various means such as ATMs, Online Banking, Bank tellers, Check writing, etc.Liquidity: As the name suggests, you can ‘demand’ money for withdrawal any time you want. Hence, you have liquidity of funds for personal and business needs.No Extra fees: Withdrawal from such an account does not have any withdrawal charges.

Disadvantages

High Fee and Lower Interest: They always pay a lower amount of interest than time depositsTime DepositsTime deposit, also known as term deposit, refers to the deposit account with fixed maturity and interest rate.read more. Also, the fee charges of the banks to maintain these facilities due to their less liquid nature are always on a higher side compared to term deposit facilities.Low Capital Appreciation:Capital Appreciation:Capital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more Interest on demand deposits is sometimes lower than risk-free investments such as “treasury bonds,” which leads to low capital appreciation compared to the market inflation rates. There are many other investment opportunities available in the market that, once explored, offer a higher rate of returnsRate Of ReturnsRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more than demand deposits.

Demand Deposits on Financial Statements

As per IFRS9 Disclosure requirements, Demand Deposits are shown as amortized cost deposits. These are categorized as current accounts and overnight deposits on ABC Bank’s balance sheet. Interest income on such deposits is shown as Net Interest Income in the Profit & Loss statement for the period of a Banking Institution. This Net Interest Income is Gross InterestGross InterestGross Interest is the interest that is to be paid to the lender by the borrower for using the funds before the deduction of any fees, taxes and other charges as applicable on it and it takes into consideration the effect of the payment against the risk covered, management service charges and opportunity cost.read more Income on Loans and Advances net of Interest expense on Demand Deposits and other deposits taken by the bank from the customers.

ABC bank’s disclosure notes also require industrial sectorial bifurcation, geographical distribution, and product classification. Resident and Non-resident distribution of deposits are also mandated in yearly disclosures.

Conclusion

Although steadily declining in importance on the commercial banking system’s balance sheet, such deposits remain an important source of funds. Privately owned demand deposits in the 1990s equaled over 30 percent of total deposits.The two most important suppliers of demand deposits to commercial banks are households and non-financial businesses. Households owned 35 percent of total private demand balances, while non-financial businesses owned 50 percent in the United States of America.Demand deposits offer higher liquidity than any other deposit products offer. It’s a readily available source of cash for individuals and businesses. Though the rate of return is lower, it offers a risk-free return.Also the fee to maintain and operate these deposits is much lower when compared to other exotic investment products available in the market.