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MONEY MATTERS Money

Money, any medium of exchange that is widely accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services. The number of units of money required to buy a commodity is the price of the commodity. The functions of money as a medium of exchange and a measure of value greatly facilitate the exchange of goods and services and the specialization of production. Without the use of money, trade would be reduced to barter, or the direct exchange of one commodity for another; this was the means used in primitive societies, and barter is still practiced in some parts of the world. In a money economy, the owner of a commodity may sell it for money, which is acceptable in payment for goods, thus avoiding the time and effort that would be required to find someone who could make an acceptable trade. Money may thus be regarded as a keystone of modern economic life.

BANKING
INTRODUCTION In the broadest sense, a bank is a financial intermediary that performs one or more of the following functions: safeguards and transfers funds, lends or facilitates lending, guarantees creditworthiness, and exchanges money. These services are provided by institutions such as commercial banks, central banks, savings institutions, trust companies, finance companies, life insurance companies, and firms that specialize in investment banking. EARLY BANKING In medieval times, the Knights Templar, a military and religious order, not only stored valuables and granted loans but also arranged for the transfer of funds from one country to another. The great banking families of the Renaissance, such as the Medicis in Florence (Italy), were involved in lending money and financing international trade. The first modern banks were established in the 17th century, notably the Riksbank in Sweden (1656) and the Bank of England (1694). Seventeenth-century English goldsmiths provided the model for contemporary banking. COMMERCIAL BANKING TODAY Loans account for over half of the total bank assets in commercial banking system. Interest from these loans is a major source of bank income. As a rule, the longer the maturity or the less creditworthy the borrower, the greater is the interest rate. The second largest category of bank assets is investments, held by banks for both liquidity and income purposes. These investments include government and government guaranteed securities, the bonds of states and municipalities, and private securities. Banks also hold cash assets, mostly for liquidity purposes, but also because the banking authorities mandate that a certain fraction of deposits be held in cash-asset form. Of the banking system's liabilities, about three-fourths are in the form of deposits, primarily from individuals and companies, but also from domestic and foreign government agencies. Reserve Bank of India is the apex body in India governing the various banks in India. The banks in India function as per the Banking Regulations Act 1949. Functions of a Bank Accepting Deposits Banks accept deposits from the public and use these funds to make various types of investments, mostly in residential real estate mortgages, and particularly in home mortgage loans.. The bulk of the banks liabilities are in the form of savings deposits. Savings & Current Accounts Savings banks were established to encourage thrift among working people and to provide a safe place for them to save. They pooled depositors' savings for investment and generally were restricted by charter to investing in government bonds.

Loans
Banks grant various loans : Loans to Corporates / Partnerships for business and capital expenditure Loans to Individuals for housing, cars, appliances, general purposes Loans are granted based on the credit worthiness of the borrower. The loans can be granted on secured or clean basis. Credit Cards Various kinds of credit cards are available with different services and products to meet the requirements of the customers. Demat of Shares Dematerialisation is a process by which the physical share certificates are taken back by the company or Registrar, and destroyed. An equivalent number of shares are credited electronically to the depository account. And, when the account holder purchase or sell shares, these are credited or debited electronically to the account holders deposit account. Currently, the National Securities Depository Ltd. (NSDL), through various depository participants, offers depository services. To switch to demat shares, the individual need to approach a Depository Participant, like Standard Chartered Bank Islamic Banking In conformity with Islamic doctrine, domestic banks in Islamic Countries have redefined the payment and collection of interest as profit. Investment partnerships between the bank and the customer have replaced loans at interest.

Types of Accounts There are various types of deposit accounts. The most popular and commonly used bank accounts are 1. Savings Bank Accounts 2. Recurring Deposit Accounts 1. Savings Bank Accounts This account is established as the name suggest, to encourage the habit of saving. The depositor can deposit and withdraw funds from his/her account. Interest is paid by the bank on this account based on the prevailing rules by Reserve Bank of India. Presently the rate of interest is %. On opening an account (pg 31) recorded by the bank. Calculating the Interest .(pg 31) .of that month ( Format of Savings Bank Account pg31) EXAMPLE OF SAVINGS BANK ACCOUNT Amount Withdrawn (Dr.) Rs. Ps. Amount Deposited (Cr.) Rs. Ps.

Date

Particulars

Balance Rs. Ps.

Initials

Example 3 (pg 33) EXAMPLE:

Ashok holds a savings bank account in a bank. The following entries are recorded on a page in his pass-book.

Date
April 1 April 6 April 18 April 25 May 23 May 30

Particulars

Amount Withdrawn (Dr.) Rs. Ps.

Amount Deposited (Cr.) Rs. Ps.

Balance Rs. Ps. 600.00 1450.00 2000.00 1200.00 800.00

Initials

By Cash By Cash By Cheque To Cheque To Cash By Cash 800.00 400.00

600.00 850.00 500.00

1200.00

2000.00

Calculate the interest earned by Ashok for the months April & May (from 1 st April to 31st May) at the rate of 5% per annum. SOLUTION: Since, the minimum amount between 10th April and the last date of April is Rs. 1200.00 Principal for the month of April = Rs. 1200.00 Similarly for the month of May = Rs. 800.00 Total Principal = Rs. 1200.00 + Rs. 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 = 1 years and rate (R) = 5% 12 INTEREST = P X R X T = Rs. 2000 X 5 X 1 = Rs. 8.33 100 1000 x 12

INTEREST 2. Recurring Deposit Accounts (pg 41)

Computing maturity value of a Recurring Deposit Account (pg 45 to 47)

INTEREST
Interest, payment made for the use of another person's money; in economics, it is regarded more specifically as a payment made for capital. Interest is usually paid only on the principal, that is, on the sum of money loaned, and it is called simple interest. In some cases, interest is paid not only on the principal but also on the cumulative total of past interest payments. This procedure is known as compounding the interest, and the amount so paid is called compound interest. The rate of interest is expressed as a percentage of the principal paid for its use for a given time, usually a year. Thus, a loan of $100 at 10 percent per annum earns interest of $10 a year. Simple Interest = Principal x Rate x Time 100 i.e. I = P x R x T 100

and Amount = Principal + Interest Compound Interest Money is said to be lent at compound int, when the int, which has .(pg 1) interest. Example (Write eg 6 pg 4) Relation between Simple Interest (S.I.) and Compound Interest (C.I.) (pg7) ..at the same per cent. Pg 11 Table of Compound Interest Pg 13

TAXATION
INCOME TAX PG 49 TO 52 Example pg 54 (eg 2) SALES TAX Pg 62 Example 7 (pg 62-63)

SHARES & DIVIDENDS


(PG 22) examples (pg 23 eg 2 &3)