Methods of Banking and Making Payments

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Chapter

METHODS OF BANKING AND MAKING PAYMENTS

CHAPTER CONTENTS
Introduction Methods of Payment The Banking System Rights and Duties of Bank and Customers Practice Questions Answer Bank

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INTRODUCTION It is important to know about the different methods of receiving payments from customers or making payments to the suppliers. Making and receiving payments are described in this chapter along with their security measures that are extremely important. Following is the list of METHODS OF PAYMENT. They are: CASH Normally used for small transactions Receipts have to be well controlled to ensure a good cashflow. There are three key features of Control Banking (performed promptly and correctly) Security (avoid loss or Theft) Documentation (remittance advice) CASH CHEQUES PLASTIC CARDS ELECTRONIC FUNDS TRANSFER AT POINT OF SALE (EFTPOS) STANDING ORDER DIRECT DEBIT BANKERS DRAFT PAY ORDER BANKERS AUTOMATED CLEARING SYSTEM (BACS) CREDIT TRANSFER OR BANK GIRO CREDIT

A RECEIPT is a document given by the seller to the buyer when goods change hands in exchange for payment. It may be a till receipt, a written or some other form of receipt. Holding cash creates problems and careful security procedures are required. For security of cash one of the most important factors is segregation of duties. Division of duties prevent fraudulent activities as well as errors made by an individual CASH REGISTER is the book where all transactions relating cash are clearly stated in accordance to the dates. Cash must be kept in night safes, strong boxes or protective glass. Large organizations should employ their own in-house security staff External security firms may be employed to collect money from the business premises and take it directly to the bank. A CHEQUE is an unconditional order in writing addressed by a person to a bank, signed by the person giving it, requiring the bank to pay on demand a sum certain in money to or to the order of a specified person. Cheques are most commonly used in large businesses Only authorized personnel can sign the cheque
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CHEQUES

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It can be sent through post as well and can be stopped CHEQUE GUARANTEE CARDS are issued to guarantee personal cheques up to a certain limit The amount equal or within the guarantee card is bound to be honoured Only one guarantee card can be used in one transaction CHEQUEBOOK COUNTERFOIL is used for personal record of when, to whom and how much of the cheque was written. It contains the date of the cheque, payee of the cheque and the amount of the cheque A cheque can be RETURNED OR DISHONOURED due to many reasons: Insufficient balance in the account Words and figures differ Cheque has expired (its valid till six months) Signatures do not match the actual one

PAYEE: For whom the cheque is written DRAWER: The one who signs the cheque PAYER: Organization or individual who is paying DRAWEE: The bank which is paying As far as the use of cheques is concerned, you should know how to do the following: Prepare a cheque for payment Deal with lost cheques Stop cheques

A cheque when lost must be stopped by calling the bank and then confirm this instruction in writing A crossed cheque can only be transferred to payees a/c ENDORSING A CHEQUE: It can be endorsed by a payee by writing his or her signature on the back of the cheque. This cheque can then be passed to another person to pay it into their own bank account Cheques are less easily exchanged by a thief, but the same security procedures should be maintained for cheques and plastic card vouchers as for cash Security procedures with regard to cheques and guarantee cards:

Chequebooks must be kept separate The number of cheques in a book must be kept minimum
Cheque guarantee cards are sent by registered post so that customers must sign for their receipt

The card remains the property of the bank and can be withdrawn at any time

PLASTIC CARDS There are two types of plastic cards, DEBIT CARD and CREDIT CARD. CREDIT CARD system is when a customer is provided credit for a specified period If payment is not done within time, interest is charged on overdue amount Card issuers often charge a flat year membership fee
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There is a credit limit for every card that varies person to person The three parties involved in a credit card are cardholder, card issuer and third party Security checks when accepting payment through a card are: Rub your thumb over the signature panel Compare the customer signature on the card with that on the voucher Check whether the card is stolen against the warning lists regularly issued by the card issuing company Check the card is valid by date Check that the transaction does not exceed the business floor limit

FLOOR LIMIT is the amount up to which a business is allowed to accept credit cards for payment and this limit is given by the credit card company. If a transaction is needed to be done above the floor limit, the business has to ring up the credit card company to ask for authorization DEBIT CARDS are designed for customers who like paying by plastic card but who do not want credit The amount is deducted directly from the customers bank account It can only be used if the customers account have funds The customer signs the voucher at the point of sale Plastic card vouchers are used to receive payment from the bank CHARGE CARD: This card was introduced before the credit cards were introduced. Credit was given for a month and the customer had to pay the outstanding balance before to use the card further in future. ELECTRONIC FUNDS TRANSFER AT POINT OF SALE is a means of allowing a transaction to be recorded immediately on customer bank accounts It makes possible the automatic transfer of funds from a customers bank account to a retail organization at the point in time when the customer purchases goods or services from it DEBIT CARD AND ATM (automatic teller machine) cards are its examples This is a simple and quick method There is no need to keep cash in hand Standing order might be used by a business to make regular payments of a fixed amount to a stated account Standing order forms used to take these facilities are called STANDING ORDER MANDATES The business must specify the following to its bank: The fixed amount of each payment The frequency of each payment and the due date Banking details of the supplier to whom the payments has to be made

EFTPOS

STANDING ORDER

If the business subsequently needs to alter the amount of each payment, or to stop future payments, it must send the relevant instructions to the bank in writing.

DIRECT DEBITS
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Direct debits are normally used to pay utility bills In this the person who receives the payments, initiates each payment, and informs the paying bank the amount of each payment Payments vary each time

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BANKERS DRAFT This is a guaranteed form of payment It is not used for small value items, but is used when a large payment is involved It cannot be stopped once issued Can be used from city to city or country to country This form of payment is used within city It is a guaranteed form of payment Once issued cannot be stopped BANKERS AUTOMATED CLEARING organization is used to pay salaries and wages to the employees in an

PAY ORDER BACS

SYSTEM

It is a quick and secure form of payment Bank Giro Credits can be paid into a bank account by the customer of the business, in which case the amounts will appear automatically on the businesss bank statement Bank charges fee for all the above provided services CENTRAL BANK is the one which controls the banking industry in a country In UK the central bank is BANK OF ENGLAND CLEARING is the mechanism for obtaining payments for cheque It takes 3 days to clear a cheque PAYING IN SLIP OR DEPOSIT SLIP is used to deposit cash or cheque. A copy is given to the customer as an evidence of amount deposited BANK STATEMENT is a document which is sent by the bank normally monthly in which the transactions on the account of a customer are stated A banker is the one who performs the following tasks: Put money and cheques received on a customers behalf into his account Take out all cheques and orders paid from the account by the customer Keep accounts, such as current accounts, which can be used for paying in or taking out on the customers behalf.

BANK GIRO CREDITS (CREDIT TRANSFERS)

THE BANKING SYSTEM

A person becomes a customer in respect of cheque transactions as soon as the bank opens an account for him in his name. It is important to know that banks owe many legal duties to customers and can be sued if they do not carry out their duties adequately BANK MANDATE FORM is the form that specifies the names and specimen signatures of individuals empowered to sign cheques supplied to a bank

The relationship between bank and customer arises from legal contracts between them, which it is necessary to understand. There are four main types of CONTRACTUAL RELATIONSHIPS, which may exist between a banker and a customer
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RECEIVABLE/PAYABLE BAILOR/BAILEE PRINCIPAL/AGENT MORTGAGOR/MORTGAGEE RECEIVABLE/PAYABLE: This is when a customer deposits money in the account. Customer is receivable and bank is payable In case of overdraft bank is receivable and customer is payable BAILOR/BAILEE: This relationship exists when a bank offers a safe deposit service to customers, which allows use of banks strong room or safe. When it accepts the customers property, bank has the following obligations To safeguard the items held To redeliver them on demand

The customer is the bailor, the bank is the bailee PRINCIPAL/AGENT: An agency relationship is one where one person (the agent) acts for another (the principal), usually for the purpose of doing business between the principal and a third party. An example is where an accountant deals with the tax authorities on behalf of a client. MORTGAGOR/MORTGAGEE: This relationship arises when a customer asks a bank to give a loan secured by a charge or mortgage over the customers assets such as property. At the same time the customer is the receivable, and the bank is payable for the amount of the loan. Customer is mortgagor and bank is mortgagee

FIDUCIARY RELATIONSHIP: This is not a contractual relationship. In a normal relationship between a bank and a customer, the bank can be in a position of exerting undue influence on the customer, perhaps forcing him to do something he does not really wish to do. This is said to be a fiduciary or special relationship. THE RIGHTS AND DUTIES OF BANKERS AND CUSTOMERS Rights of Bankers Making charges or commissions Using customers money Demanding repayment of overdrawn balances Possess security for loans Ensuring that fraud is not facilitated when drawing cheques Indemnifying the bank when it acts on behalf of the customer Honour a customers cheque Receipt of customers funds Repayment on demand Comply with customers instructions Provide a statement Confidentiality except: Required by law, public duty or consent of customer Advise of forgery
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Duties of Customers

Duties of Bank

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1.

Care and skill Closure of accounts (notice) Customers have obligations to their bank. Which one of the following is a customers obligation? A. B. C. D. To repay the amount of their deposits on demand Not to disclose any information regarding the affairs of the bank To use a professional level of care and skill in dealing with their accounts Not to draw up cheques in a way to facilitate forgery When it is more than six months out of date When it is unsigned When the account holder has insufficient funds to cover the cheque When the cheque is crossed A/c payee and the named payee presents it (i), (ii) and (iii) (i), (ii) and (iv) (i), (iii) and (iv) (ii), (iii) and (iv) Cheques guaranteed need not go through the clearing system Cheques guaranteed within the card limit may not be dishonored It is evidence that an individual is authorized to sign business cheques It enables someone other than the account holder to sign a cheque

MULTIPLE CHOICE QUESTIONS

2.

Why might a bank return a cheque to the payee? (i) (ii) (iii) (iv) A. B. C. D.

3.

What is the effect of a cheque guarantee card for a customer? A. B. C. D.

4.

Which payment form allows a purchaser to immediately transfer money from her bank account to the sellers bank account? A. B. C. D. Bank guarantee card Charge card Credit card Debit card BACS Credit transfer Direct debit Standing order

5.

Which form of automated payment would be better in paying wages to employees? A. B. C. D.

6.

In which of the following case would a different form of payment be requested for the purchase of goods costing $40. A. B. C. D. When a customer pays by cheque under a valid cheque guarantee card When a customers credit card company states that the transaction would exceed his credit limit When a customer pays by $1 and $2 coins When a customer is only able to pay by debit card Agreeing a loan or overdraft between bank and customer The transfer of cheques between the payees bank to payment at the drawers bank
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7.

What is the explanation of the bank clearing system? A. B.

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C. D. 8. A. B. C. D. 9.

The electronic transfer of funds enabling a supplier to be instantly paid by debit cards Checking customer references before they are given a credit card Account number Cheque number Drawee Sort code

What is common between a bank and customer?

David makes a regular monthly payment from his bank account to his daughters bank account to cover her living expenses while she is at university. What method of payment is David using? A. B. C. D. Account payee crossed cheque BACS Direct debit Standing order

10.

A bank dishonors a cheque on a partnership account because there are not sufficient funds on the account. Who must now pay the outstanding amount? A. B. C. D. The bank The partnership The payee of the cheque The person who was the authorized signatory

11.

When banking cash, some security procedures should be followed wherever possible. Which of the following is the most risky? A. B. C. D. Ensuring that the employee taking the cash to the bank or night safe is accompanied by another employee Not always going to the bank or the night safe at the same time of day or by the same route Using the same responsible employee to take the cash to the bank Using a security firm to transport the cash to the bank if necessary The drawer The drawee The payer The payee

12.

The name of the person who signs the cheque is: A. B. C. D.

13.

If a cheque has been signed on the back by the payee, together with a written instruction to pay a third party, this would be known as: A. B. C. D. An endorsement A cheque guarantee A crossed cheque A credit transfer

14.

A customer has a card issued by his bank that allows him to make purchases up to a certain credit limit. He receives a statement each month detailing his purchases and he is required to pay off the total amount of the balance outstanding each month. This is an example of: A. B. A debit card A credit card

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C. 15.

A charge card

16.

17.

18.

19.

20.

D. A cheque guarantee card Each month the amount of money that you owe on a store credit card is paid automatically and directly to the store out of your bank account. The amount and the date of payment vary each month. This is an example of: A. A standing order B. A credit transfer C. A mail transfer D. A direct debit The drawee of a cheque is the: A. Person or business who is paying B. person or business who is being paid C. Person who signs the cheque D. Bank of the person or business who is paying The parallel lines drawn on a cheque means that: A. Only the payee can cash the cheque at the bank B. This cheque can only be deposited in the payees bank account C. This cheque cannot be cashed at the bank, it can only be paid into a bank account D. This is now a bearer cheque which is payable to the holder There is a type of card which can be used to pay for goods, the amount of which is electronically deducted from your bank balance immediately. This type of card is called a: A. Debit card B. Credit card C. Cheque guarantee card D. Charge card Gary makes regular quarterly payments for gas and electricity. Gary filled in a form of authorization and the suppliers then set up their own arrangement with the bank to collect amounts due. Gary is always informed of these amounts. This means of payment is known as: A. Direct debit B. Inter bank transfer C. Standing order D. EFTPOS A document accompanying a cheque payment to a supplier, detailing the invoices being paid is called a: A. Suppliers statement B. Debit note C. Remittance advice D. Remittance list EFTPOS means: A. B. C. D. Electronic Financial Transaction for Purchase of Stock Electronic Funds Transfer at Point of Sale Electronic Financial Transaction at Point of Sale Electrical Funds Transfer for Purchase of Stock Credit card
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21.

22.

Which card will normally be requested to accompany a payment by cheque? A.

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B. C. D. 23. (i) (ii) (iii) (iv) A. B. C. D. 24. A. B. C. D. 25. A. B. C. D. 26. (i) (ii) (iii) (iv) A. B. C. D. 27. (i) (ii) (iii) (iv) A. B. C.

Cheque guarantee card MasterCard Store card It is signed It is valid at that days date It has not been altered/tampered with It is issued by a bank All (i), (ii) and (iii) only (i) and (ii) only (ii) and (iv) only Head office of a major bank City centre branch of a bank Bank of England Royal Mint 7 days 5 days 10 days 3 days Debtor/Creditor Principal/Agent Mortgagor/Mortgagee Bailor/Bailee All (i) and (iv) only (i) and (ii) only (i), (ii) and (iii) only Promote the banks services Not encourage fraudulent activities Not to misuse any cheque guarantee card Not to open an account elsewhere without notice All (i), (ii) and (iv) only (ii) and (iii) only

What details on a credit card should a cashier check when they receive a payment for goods?

What is meant by The UK central bank?

In how many days would a cheque between banks clear through the UK clearing system?

Which of the following states a contractual relationship between a bank and its customers?

Which of the following are the duties of customers towards their bank?

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D.

(i), (ii) and (iii) only

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28.

Which of the following documents would be required when paying in the daily takings to the bank? (i) (ii) (iii) (iv) A. B. C. D. Cheques received Copy credit card vouchers Cheque remittance list Copy credit card summary (i) and (ii) only (i), (ii) and (iv) only (i), (iii) and (iv) only All Sufficient money in the bank Evidence of an underlying transaction and an approved payment A receipt stapled to an invoice A remittance advice and the accompanying statement from supplier A credit card in excess of its limit A cheque on which the amounts in words and figures differ Cash Barter

29.

What is needed to ensure a cheque to be properly authorized? A. B. C. D.

30.

Which of the following is a valid method of making payment? A. B. C. D.

31.

When presenting a debit card to pay for goods at a departmental store, the card is rejected with the message that the limit has been exceeded. What action should the checkout operator take? A. B. C. D. Ask the customer to make payment by some other means Authorize an increased debit card limit for the customer Call the police and have the customer arrested Let the customer take the goods and come back later to make payment The transactions on the bank account of a business The transactions between customer and supplier Petty cash transactions Transactions on a company credit card To use a professional level of care and skill To provide confirmation of the balance on the account at any time at the request of the customer To provide a statement covering a period showing the transactions which have occurred during that period To provide a statement detailing the profits the bank has made with the money the customer has deposited A key must be inserted in to the cash register before it will operate. Keys are held by authorized personnel

32.

Which one of the following is included in a bank statement? A. B. C. D.

33.

Which of the following is least likely to be a duty of a bank towards its customer? A. B. C. D.

34.

Which of the following is not an effective security process? A.

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B. C. D. 35. A. B. C. D. 36. A. B. C. D. 37. A. B.

Cash is counted by a responsible person who works on the cash register The cash reconciliation should be performed by a responsible person who neither operates the cash register nor counts the cash Cash should be banked as promptly as possible An unsigned cheque A crossed cheque made out to the person presenting it An account payee cheque paid in by the named person A large amount in notes A system of payment for goods and services via electronic funds transfer at point of sale A system of electronic payment by debit card A system of electronic payment by credit card An electronic system that a business can use to monitor its cash receipts A contractual relationship A special relationship in law even though it may not be contractual where one party is in a position to exert undue influence on another and must therefore be shown to act in good faith Not recognized in law unless it is contractual Between principal and agent To stop it being paid into an account other than the payees To speed up the time it takes to go through the clearing system To allow it to be paid into any account, not just the payees To tell the bank to check that there is enough money in the account to pay it

In which of the following case will a bank refuse to accept?

EFTPOS is best explained as:

A fiduciary relationship is best described as;

C. D. 38. A. B. C. D. 39.

What is the reason of crossing a cheque?

Bevan is employed as an accounting technician in the payables ledger section of a contract cleaning company. Upon making payment to a supplier, what is the sequence of events that Bevan should carry out? A. B. C. D. Draw up a cheque for signing, check invoice with goods received note, check invoice with purchase order, check invoice calculation Check invoice with purchase order, draw up a cheque for signing, check invoice with goods received note, check invoice calculation Check invoice with purchase order, check invoice with goods received note, check invoice calculation, draw up a cheque for signing Check invoice calculation, draw up a cheque for signing, check invoice with purchase order, check invoice with goods received note This is an instruction to a bank to make a payment directly to a supplier A list of personnel within a company authorized to sign a cheque Names and specimen signatures of individuals empowered to sign cheques supplied to a bank A request to open a bank account
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40.

The bank mandate form is: A. B. C. D.

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41.

Which of the following is a characteristic of a bank draft? A. B. C. D. It can be stopped after issue It is signed by the directors of the company making the payment It is a secure form of payment for the recipient It provides a cheap source of finance for high value purchases Used to make regular payments from an account The payment amount cannot be varied The recipient of the payment initiates cash payment The amount of payment remains the same

42.

Which of the following is not a distinctiveness of a standing order? A. B. C. D.

43.

A customer pays for goods using a credit card. Which of the following procedures should be followed? A. Write the details of the sale on the voucher Give the voucher to the customer for signature Check the floor limit and seek authorization code Pass the voucher over the credit card suing the imprinter Write the details of the sale on the voucher Check the floor limit and seek authorization code Give the voucher to the customer for signature Pass the voucher over the credit card using the imprinter Write the details of the sale on the voucher Pass the voucher over the credit card using the imprinter Check the floor limit and seek authorization code Give the voucher to the customer for signature Pass the voucher over the credit card using the imprinter Check floor limit and seek authorization code Give the voucher to the customer for signature Write the details of the sale on the voucher The organization can invoice 1st bank, electronically, for the value of goods sold in a trading period EFTPOS acts as a from of on line validation of cheques rendered by customers Funds are transferred automatically from a customers bank account to the organizations bank, when goods are purchased EFTPOS system will initiate a payment to the organization at the end of a trading period The sale should be tactfully refused The police should be called immediately The sale should be accepted The credit card company should be contacted The payee The banker The drawer The creditor

C.

D.

44.

Which of the following best describes the EFTPOS system? A. B. C. D.

45.

If a customer tries to make a purchase with a credit card in excess of a retailers floor limit: A. B. C. D.

46.

When Lee makes out a cheque for $50 and sends it to Young, then Lee is known as: A. B. C. D.

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47.

When banking money in your account, you should always use: A. B. C. D. A cheque book A paying in slip A cash book A general ledger

48.

As a general rule, banks must keep customers affairs confidential. Which of the following is not a suitable reason for disclosure? A. B. C. D. When a customer has given permission to a third party to obtain a bankers reference When there is a public duty to make disclosure When the bank suspects the customer is engaged in illegal activities When disclosure is specifically required by statute The date of the cheque The bank account number The party to whom the cheque was made out to The amount of the cheque

49.

Which of the following need not be written on a cheque counterfoil? A. B. C. D.

50.

Which of the following fits the definition of an order to the bank to pay a regular fixed amount to a third party? A. B. C. D. A cheque A standing order A direct debit A debit note He hopes to do more business if he allows his customers time to pay their bills. He receives his money more quickly. He is afraid of incurring bad debts. He is afraid of handling large amounts of cash. The right to close a customers account at any time without notice. The right to charge a reasonable commission for its services. The right to repayment on demand of any overdrawn balance. The right to expect the customer to user reasonable care in drawing cheques.

51.

Which of the following might be a reason why a shopkeeper grants credit to his customers? A. B. C. D.

52.

Which of the following is not a right of a bank? A. B. C. D.

53.

Faizal buys a new cricket bat and pays for it with his credit card; the bat costs $50.The following happens immediately: A. B. C. D. Faizals bank account is immediately debited with $50. Faizals bank account is immediately credited with $50 Faizal owes the credit card company $50 Faizal owes the credit card company $50plus interest.

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54.

Bella buys a new pair of jeans in a boutique for $30.She pays by cheque which she supports with a cheque guarantee card. The shop A. B. C. D. Will receive its $30 as long as Bella has at least $30 in her bank account on the day the Cheque is written. Will receive its $30 as long as Bella has at least $30 in her bank account on the day the Cheque is presented for payment by the shop to its bank Will receive its $30 as long as Bella has at least $30 in her bank account on the day the Cheque is cleared. Will receive its $30 whether Bella has $30 in her account or not. ACAPS BACS CHAPS EFTPOS

55.

Debit cards work via the system known as A. B. C. D.

56.

When receiving a cheque in payment, which is backed up, by a cheque guarantee card. Which is it not necessary for a shop assistant to check? A. B. C. D. That the date entered on the cheque is correct. That the amount of money in words tallies with the amount of money in figures. That the signature tallies with tat on the cheque guarantee card. That the persons account is in funds. Report the loss immediately to the credit card company. Report the loss immediately to the bank Report the loss to the bank on the next working day. Nothing the credit card company will know of the loss automatically.

57.

If a credit card is lost, what should the holder do? A. B. C. D.

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ANSWERS TO MULTIPLE CHOICE QUESTIONS

Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Answers D A B D A B B A D B C A A C D D B A A C B B B C D A C B B Questions 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 Answers C A A D B A A B A C C C C C C A C B C B B A A C D D D A

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