Service of the Bank to the Community.—Practically all business houses at the present time take advantage of the banking facilities to be found in every community where there is enough business transacted to justify the establishment of a bank. A bank is sometimes defined as an institution which deals in money and credit. One of its chief functions and the one on which its main income is based is that of acting as a place for the deposit of moneys, these deposits forming the basis for its loans and discounts. Among its other important functions and services are to collect drafts and checks drawn on other banks; to issue and sell its own drafts on other banks, thereby enabling its customers to make payments to out-of-town creditors; to discount commercial paper, i.e., to loan money to its patrons on approved security; and to issue paper currency.

Opening an Account with the Bank.—Because so much of the bank’s business is based on the honor and integrity of its customers, a prospective depositor is usually required to present a card of introduction signed by a customer of the bank or someone else known to it. A depositor who wishes to open a checking account is asked to file a “signature” card bearing the signatures which he will use in signing checks. As considerable expense attaches to handling depositors’ accounts, some banks require that the balance of the account shall never fall below a fixed minimum.

The Deposit Ticket.—When an account is opened, the depositor is provided with a pass-book and check book. All deposits are made by means of deposit tickets, discount memoranda, or collection notices. The deposit ticket is in form similar to the following:

All moneys and checks deposited are listed on this ticket under the indicated classifications. The deposit is handed to the receiving teller of the bank, who, after verifying the ticket, makes an entry of the amount in the depositor’s pass-book. Duplicate deposit tickets are usually kept by the depositor. It is important to note that checks must be indorsed before they are deposited, so as to make them collectible by the bank.

The Pass-Book.—The pass-book is the record of the depositor’s dealings with his bank and, although written up by the bank teller, it is usually kept from the depositor’s viewpoint, i.e., the bank is debited with all deposits and credited with all checks presented for payment. At stated intervals, say monthly, the book is left with the bank for balancing, at which time the total amount of checks paid by the bank is entered in the pass-book and the canceled checks are returned to the depositor. Sometimes the pass-book is kept in account form, the left page indicating deposits, and the right page payments by the bank. More frequently, however, the pages of the pass-book do not have debit and credit significance but constitute a continuous record. In this case, at the end of the period, the deposits are footed and the total of the checks is subtracted from the total deposits, thus showing the balance due the depositor.

A method coming into quite general use among banks is to send a monthly statement of account just as trading concerns do. This statement is a transcript of the bank’s ledger account kept with each depositor, showing deposits and withdrawals. When this is done, withdrawals are not entered on the pass-book, which thus serves only as a memo or receipt of the moneys deposited.

The Check Book.—The check book is provided either with a stub, counterfoil, or interleaf, for making a duplicate record of the check drawn. Provision is usually made in the check book for the entry of the deposits. Sometimes each check is subtracted from the previous balance and the amount of the new balance shown; more often, total checks and total deposits are shown separately and in this way, while it is an easy matter to find the balance by subtracting the total checks from the total deposits, the actual figure does not appear and hence is not available to curious eyes.

The balance shown in the monthly statement or by the periodic balance of the pass-book is seldom the same as that shown in the depositor’s check book, due to the fact that certain checks issued by the depositor have not yet been presented for payment to the bank. The method of reconciling the pass-book with the bank balance is treated in Chapter L, “Accounts Current.”

Securing a Loan through the Discount of a Note.—A common practice of business men in borrowing money is to discount or sell to their bank or to a broker their own promissory notes and those received from customers. When merchants discount their own notes at a bank, the notes bear only one signature, that of the merchant, and for this reason they are called “one-name” paper. If a merchant receives a note from a customer, indorses it, and then discounts it at the bank, two signatures appear on it—that of the original maker and that of the indorser. Notes of this kind are called “two-name” paper. Banks usually prefer two-name paper because, if the maker fails to pay the note at maturity, the indorser can be held liable for its payment, while in the case of one-name paper the bank has recourse to no one except the maker.

When a merchant makes out a promissory note of, say, $1,000 due 90 days after date, and discounts it at his bank, the bank usually deducts interest at, say, 6%, from the face of the note; i.e., the merchant is credited not for the full $1,000 but only for $985, and when the note matures he either pays the amount, $1,000, or his account is debited with it. The $15 is called “discount” because it is “subtracted” from the face of the note; but since this item is paid for the use of the amount loaned by the bank, it is of the same nature as interest. There is no reason, therefore, for keeping two separate ledger accounts, one for discount and one for interest paid, the two usually being combined under one title, “Interest and Discount” or “Interest.”

Principles to be Observed in the Calculation of Interest.—In connection with interest computations it is important to observe the following points, the principles involved in each case being best explained by making use of suitable illustrations.

1. In commercial practice, when the interest period is expressed in months, the interest for each month is one-twelfth of the annual interest, i.e., a note for $1,000 dated April 11, 19—, due “three months from date,” matures July 11 and the interest at 6% is 6% of $1,000 divided by 12 multiplied by 3, or

2. Were the same note worded “ninety days from date,” it would mature July 10 instead of July 11, the number of intervening days being 19 in April, 31 in May, 30 in June, and 10 in July; total 90 days. The interest would amount to

3. If a note is dated March 6, 19—, and matures, say, on April 30, the interest period is 55 days (25 in March and 30 in April). Usually, in computing the number of days in the interest period the opening date is omitted but the closing date is included. In some instances the practice is to include both days.

It is important to note that it is almost a universal custom to use 360 as a denominator in all these cases, although the theoretically correct number is 365. This is done for the reason that the use of 360 greatly facilitates the computation. The government of the United States makes an exception to this rule and counts the year as 365 days, and disregards the month as a unit base; i.e., instead of counting the month of January as ¹/₁₂ of a year, its computation requires the use of the fraction ³¹/₃₆₅ as the multiplier. Interest on $1,000 for, say, 12 days, by this method, amounts to

instead of

The incorrectness resulting from the commercial method (using 360 days as denominator) usually is negligible and is fully justified by the economy of time in computation. It may be noted that under this practice the amount of annual interest is ¹/₇₂ more than under the method used by the government.

4. When paper is discounted by a bank, even though its term be given in months, the bank invariably counts the exact number of days in estimating the amount of the discount. Take a note dated June 25 with a term of 3 months and due therefore on September 25, but discounted at the bank on July 25. The term of discount, instead of being 2 months, would be for 62 days, a gain to the bank of 2 days on a 360-day basis.

Short Methods of Interest Computation.—In calculating interest or discount, the so-called 12% or 6% method seems the easiest of application. Its base is taken as $1. In the 12% method the interest for a year is therefore 12 cents, for a month 1 cent, and for a day ⅓ mill. In the 6% method, the interest for a year is 6 cents, for a month ½ cent, and for a day ⅙ mill. Using these fractions with the years, months, and days as multipliers, the result is the interest on $1 for the given period. This result multiplied by the face of the note gives the required interest, assuming that the interest rate is 12% or 6%.

A variation of the above gives the following rule, somewhat easier to apply. Reduce the time to days—using a 360-day year, 30-day month basis; multiply the time by the face, point off three places (i.e., treat the product as mills), and divide by 3 or 6 according as the calculation is on a 12% or 6% basis. If the basis used is 6%, but the actual rate is different, add or subtract whatever aliquot part the given rate is more or less than 6%; i.e., if the rate is 8%, add ²/₆ or ⅓; if 5%, subtract ⅙; etc. The following example will illustrate:

A note for $1,000 dated June 10, 19—, for 4 months, with interest at 7%, was discounted July 30 at 8%. Find the net proceeds. The note when due will be worth $1,000 plus 4 months’ interest at 7%. That becomes the basis for the discount calculation.

Applying the 6% method: