NEW EDITION
NEW EDITION
®
Heinemann Office Administration for CSEC® new edition
pl e
The student-friendly and authoritative guide to office administration from Heinemann has been fully updated to match the 2012 CSEC® curriculum.
Avon Banfield holds a Bachelor’s degree in Office Administration and Technology from Bernard M. Baruch College (CUNY) in New York. She has been teaching for the past ten years at the Secondary level in Barbados, West Indies. She not only has experience in teaching CXC Office Administration, but also has working experience as an office administrator for well over 15 years in the private sector.
CSEC® is a registered trademark of the Caribbean Examinations Council (CXC). Heinemann Office Administration for CSEC® is an independent publication and has not been authorised, sponsored, or otherwise approved by CXC.
®
Sa
Consultant: Adele Harlequin is the Regional Information Technology Officer for the Ministry of Education in Guyana.
® NEW EDITION
Dr Alan Whitcomb is internationally known as an outstanding author of business-related books. He has wide experience in commerce and industry at management level, as well as extensive experience in education and publishing.
m
Highlights of the book: • Key words, structured and exam practice questions provide extensive opportunities for learning and recapping essential topics. • An extensive guide to SBAs ensures that teachers and students are well supported in preparation for the assessment. • Interactive digital support is provided, to help students make the most of the time they spend revising, through the inclusion of a complementary Exam Café CD-ROM as well as a website with supplementary resource materials: www.pearsoncaribbean.com/officeadministration
WITH COMPANION WEBSITE
CD-ROM INSIDE
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®
CSEC® is a registered trademark of the Caribbean Examinations Council (CXC). Heinemann Office Administration for CSEC® is an independent publication and has not been authorised, sponsored, or otherwise approved by CXC.
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Contents About this book How to use this book
v vi
5.5 Parcel services 5.6 Things to do
Section I OFFICE ORIENTATION
1
Chapter 6 The mail room
86
Checklist Content
1 2
6.1 Incoming mail procedures 6.2 Procedures for despatching mail 6.3 Automation of mail activities 6.4 Things to do
86 89 90 92
Section III RECRUITMENT AND ORIENTATION
97
Checklist Content
97 98
Chapter 1 The office environment
3
1.1 The role and functions of the office 1.2 The size and nature of the business 1.3 The physical organisation of the office 1.4 Organisational structure 1.5 Centralisation and decentralisation 1.6 Office equipment and machines 1.7 Types of office careers 1.8 Human relationships 1.9 Things to do
3 5 6 8 13 15 17 22 24
Section II COMMUNICATION
29
Checklist Content
29 30
Chapter 2 Effective business communication
31
2.1 The importance of business communication 2.2 External and internal communication 2.3 Channels of communication 2.4 Selecting communication media 2.5 Communication flows 2.6 Barriers to communication 2.7 Centralised and decentralised decision-making 2.8 Things to do
31 32 33 42 43 44 45 46
Chapter 3 Business correspondence
52
3.1 Format and composition of letters 3.2 Paper and envelopes 3.3 Standardised letters 3.4 Proof-reading 3.5 Abbreviations used in business 3.6 Reference sources 3.7 Things to do
52 55 57 57 58 58 61
Chapter 4 Telephone communication
65
4.1 Telephone techniques 4.2 Telephone-related equipment 4.3 Telephone costs 4.4 Time differences 4.5 Things to do
65 68 71 71 73
Chapter 5 Despatching mail
76
5.1 Courier services 5.2 The importance of postal services 5.3 Letter services 5.4 Special delivery services
76 76 76 77
82 83
Chapter 7 Recruitment and orientation
99
7.1 Sources of job information 7.2 Seeking employment 7.3 Employment applications 7.4 Interviews 7.5 Appointments and induction 7.6 Training and development 7.7 Resignation and dismissal 7.8 Grievance procedures 7.9 Things to do
99 99 102 106 107 107 108 109 110
Section IV RECORDS AND INFORMATION MANAGEMENT 113 Checklist Content
113 114
Chapter 8 Records and information management
115
8.1 Information-management systems 8.2 Duties of a records-management clerk 8.3 Records-management systems classification 8.4 Indexing 8.5 Inactive files 8.6 Legal implications 8.7 Filing equipment and supplies 8.8 Centralised and department/decentralised records-management systems 8.9 Electronic records storage 8.10 Things to do
115 116 118 121 123 125 126 130 131 133
Section V RECEPTION AND HOSPITALITY 139 Checklist Content
139 140
Chapter 9 Reception and hospitality
141
9.1 The contribution of the reception desk 9.2 Duties and responsibilities of a receptionist 9.3 Attributes of a receptionist 9.4 Managing appointments 9.5 Things to do
141 142 145 146 147
ii
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Section VI MEETINGS
151
Checklist Content
151 152
Chapter 10 Business meetings
153
10.1 The importance of meetings 10.2 Principal officers 10.3 Voting 10.4 Types of meeting 10.5 The agenda 10.6 Organisation of meetings 10.7 Minutes 10.8 Legal requirements 10.9 Things to do
153 154 154 155 157 158 159 161 163
Section VII TRAVEL ARRANGEMENTS
167
Checklist Content
167 168
Chapter 11 Travel arrangements
169
11.1 Travel information 11.2 Making travel arrangements 11.3 Preparation of itineraries 11.4 Time differences 11.5 Interpreting schedules 11.6 Travel documents 11.7 Monetary instruments 11.8 Things to do
169 170 172 174 176 177 178 180
Section VIII HUMAN RESOURCE MANAGEMENT
183
Checklist Content
183 184
Chapter 12 Human resources office
185
12.1 The importance of human resources 12.2 Working in the human resources office 12.3 Recruiting employees 12.4 Selection 12.5 Staff induction and training 12.6 Employee evaluation 12.7 Staff welfare 12.8 Disciplinary procedures 12.9 Personnel records 12.10 Employee turnover 12.11 Things to do
185 185 187 190 191 193 195 199 200 202 203
Section IX ACCOUNTS AND FINANCIAL SERVICES
209
Checklist Content
209 210
Chapter 13 The accounts office
211
13.1 Role and functions of the accounts office 13.2 Working in an accounts office 13.3 Accounts documentation 13.4 Accounting equipment 13.5 Things to do
211 220 220 223 224
Chapter 14 Petty cash
228
14.1 The use of petty cash 14.2 The imprest system 14.3 Things to do
228 228 231
Chapter 15 Financial institution services
236
15.1 Financial institutions 15.2 Payments through financial institutions 15.3 Bank accounts 15.4 Cheques 15.5 The bank statement 15.6 Banking services 15.7 Things to do
236 237 237 239 241 244 249
Section X PROCUREMENT AND INVENTORY MANAGEMENT 253 Checklist Content
253 254
Chapter 16 The procurement office
255
16.1 Role and functions of a procurement office 16.2 Purchasing terminology 16.3 Duties of a purchasing clerk 16.4 Purchasing procedures 16.5 SI units of measurement 16.6 Purchasing documentation 16.7 Things to do
255 257 258 259 261 261 264
Chapter 17 Inventory management
268
17.1 Inventory management in context 17.2 The importance of inventory management 17.3 Orders, requisitions and stock records 17.4 Maintaining adequate stock 17.5 Stock-recording methods 17.6 Stocktaking and stock valuation 17.7 Computerised stock records 17.8 Things to do
268 268 269 271 271 273 274 277
iii
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Contents
Section XI SALES, MARKETING AND CUSTOMER SERVICE
281
Checklist Content
281 282
Chapter 18 Sales, marketing and customer service
283
18.1 Functions of the sales office 18.2 Functions of the marketing office 18.3 Functions of the customer service department 18.4 Duties of a sales office clerk 18.5 Duties of a marketing clerk 18.6 Duties of a customer services clerk 18.7 Document preparation 18.8 Discounts 18.9 Corporate communications clerk 18.10 Things to do
283 285 287 288 289 290 291 297 298 299
Section XII OPERATIONS, DESPATCH AND TRANSPORT SERVICES
303
Checklist Content
303 304
Chapter 19 The operations office
305
19.1 The importance of the operations office 19.2 The functions of an operations office 19.3 Duties of an operations office clerk 19.4 Operations office documentation 19.5 Things to do
305 306 308 309 314
Chapter 20 The despatch and transport offices
318
20.1 The importance of despatch and transport departments 20.2 Functions of the despatch office 20.3 Duties of a despatch office clerk 20.4 Functions of the transport office 20.5 Duties of a transport office clerk 20.6 Despatch and transport office documentation 20.7 Things to do
318 318 320 320 321 321 328
The school-based assessment The examination Answers to exam practice questions Index CD-ROM
331 339 342 343
iv
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About this book This book will help you to prepare for the CSEC® examination in Office Administration. It will take you section by section through the syllabus. At the beginning of each section, you will find a checklist which tells you exactly what you will need to know for the exam.
The penultimate chapter of the book covers the school-based assessment (SBA) section of the examination (paper 3). The main principles of the SBA are explained and you will find detailed guidance on: •
mark-earning areas
To support you in your learning, there are a variety of activities in the Things to do section at the end of every chapter:
•
selection of research topics
•
data collection strategies
•
design of data collection instruments
•
Make a note of it will enable you to produce revision notes.
•
questionnaire design and analysis
•
Key words list important terms used in the chapter. This will help you to form a glossary of key terms that you might like to add further items to.
•
project presentation.
•
Exam practice questions will give you the opportunity to practise for the multiple choice test (paper 1 of the exam).
•
Structured questions are largely data-based and are stepped in difficulty. An allocation of 20 marks is suggested for each question.
•
Research assignments will give you the opportunity to gain skills and practise for the school-based assessment (SBA). Completing the assignments will help you to demonstrate that you can carry out investigative work and provide evidence of independent thought.
The final chapter is divided into two parts. The first explains the format and requirements of the examination and the second suggests some useful exam techniques. Your own personal CD-ROM is provided with this book. This contains exercises that will help to consolidate the learning you have experienced as you work through the book. The activities on the CD-ROM include a range of multiple choice questions and also model answers to questions related to topics covered within the book.
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Chapter
How to use this book
At the beginning of each module you will see a checklist which tells you what you will need to know for the exam. Each module is divided into chapters. At the end of each chapter there is an important section called Things to do. These activities aim to reinforce and test what you have learnt. When you have read the relevant part of the chapter carefully, this section will help you to form revision notes and prepare you for the examination and school-based assessment. This is what you need to do here: Make a note of it: Write out the questions and answers – you can use these as revision notes later. The questions are set in the order the topics appear in the text, so it is easy to find the information you need. Key words: You will find ten key words which feature in the chapter studied. Write a separate sentence for each key word, showing that you understand what each key word means in the context of the chapter. Doing this activity you will be creating your own glossary of terms. You might want to write the key word and underline it within your explanation. Exam practice questions: Five multiple choice questions are included in every chapter. Choose the most appropriate answer from the alternatives given.
Structured questions: These multi-part exercises test whether you can respond appropriately to questions on the topic studied. The questions are structured and are worth marks that indicate their level of difficulty: you are scored at the end of each part of the exercise. This score is a guide to the level of difficulty of these questions, and should not be confused with the marks given in examination questions. Research assignment: This is the most challenging part of the activities. The research assignment involves a series of tasks which will help you learn to carry out the kind of independent research required for the school-based assessment. CD-ROM support: This symbol shows where a spreadsheet has been recreated as an electronic file and can be accessed on the accompanying Exam CafĂŠ CD-ROM.
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Section IX
Chapter 15 Chapter
Accounts and financial services
Financial institution services
15.1 Financial institutions A financial institution is an institution that provides financial services for its clients or members. They act as financial intermediaries. Most financial institutions are regulated by government bodies. Broadly speaking there are three major types of financial institutions: 1
Deposit-taking institutions that accept and manage deposits and make loans (this category includes banks, credit unions, trust companies and mortgage companies).
2
Insurance companies and pension funds.
3
Brokers, underwriters and investment funds.
The central bank A country’s leading bank is its central bank (sometimes called reserve bank), which acts as banker to the government and the banking system and acts as the authority for implementing the government’s monetary policy. The central bank gives a clear picture of the financial state of the economy of the home country. The central bank is often referred to as The Bank in its home country. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of its home country, and to commercial banks. In this way, the central bank is able to influence the ‘cost of borrowing’ through the interest rates it charges, and its control of the volume of money in circulation.
Commercial banks A commercial bank is a type of financial intermediary. It is the kind of bank that you are probably most familiar with. It provides cheque accounts, savings accounts, and accepts deposits. You learnt about the basic types of account in Chapter 13 and you might want to look back at that chapter now to refresh your memory. Later in this chapter you will learn about operating a bank account in a business context. 236
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Investment companies An investment company is a company whose main business is holding securities (a negotiable instrument representing financial value) of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. An investment company can act for a business by investing extra funds they have available and loaning them funds when they are short of cash flow. As such, an investment company is a business in its own right, but also supports other businesses.
Credit unions A credit union is a cooperative financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services for it’s members. Many credit unions exist to promote community development or even sustainable international development on a local level. As such, a credit union may accept investment from, and provide support for, a locally based business. Credit unions offer many of the same services as banks, but they differ from banks and other financial institutions in that the members who have accounts in the credit union are the owners of the credit union. In addition, the interest rates are often lower than that of the banks.
Insurance companies Insurance is a form of risk management, primarily used to hedge against the risk of a loss. In effect, for a fee (called a premium), a business (or a private individual) transfers the risk of a loss to the insurance company. An insurer is a company selling insurance, an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged (the premium) for a certain amount of insurance coverage.
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15 Financial institution services
One could argue that although the charge for insurance cover is a cost to the business, insurance releases funds to the business that would otherwise be tied up in contingency in case of a possible crippling disaster.
Bureau de change (cambio) A bureau de change (the plural is bureaux), also known as cambio, is a business whose customers exchange one currency for another. Some countries have different names for these businesses, including: money exchange, foreign exchange, and currency exchange. The rate of exchange is set internationally by the foreign exchange market, which is one of the largest financial markets in the world. Businesses earn from the exchange of currency because of the differences between the buying rate and the selling rate.
Offshore institutions Offshore financial centres (OFCs) refer to lowtax countries that offer specialist corporate and commercial services to non-resident, i.e. offshore, companies or institutions. They specialise in the investment of offshore funds. Many leading OFCs are located in the Caribbean region and attract investment from around the world.
15.2 Payments through financial institutions Individuals and businesses need to transfer money to each other in order to receive and make payments in settlement of bills and debts. Money-transfer services are mainly provided by banks, and it is the banking facilities that are particularly examined in this chapter. However, you should bear in mind that there are other financial organisations that also provide money-transfer services, i.e. credit bureaux and post offices. Commercial banks, such as those found in most main towns, are the major suppliers of moneytransfer services, and they compete to provide banking services and, therefore, differ slightly in their offers of service. There are a lot of similarities in the money-transfer services they provide, although sometimes the names they give a facility may differ.
15.3 Bank accounts There are two main types of bank account and each serves a different purpose. A third kind of account is a loan account. Interest is charged on bank loans and it is from this interest and the charges made on current accounts that banks make their profit, along with investments they make with customers’ deposits and savings.
Types of bank account Deposit/savings accounts This type of account earns interest and is used if you want to leave money in the bank when it is not required for immediate use. There are several types of deposit account serving different needs.
Current/chequeing account Charges are paid to the bank for operating this kind of account. It is used for making payments, and a cheque book and payment/ATM card are usually provided (ATM means automatic teller machine).
Services provided by banks for making payments We need to look at the ways in which banks provide services to enable the making and receiving of payments. The following is a list of possible services to choose from. We will look at each of these in more detail later. It is important to note that the commercial banks are businesses like any other and, although they may have services in common, they can vary slightly from one bank to another (much like a hair salon!). All commercial banks are carefully monitored by the government, and they are in competition with one another. •
Cash: This refers to money in the form of bank notes and coins. It is commonly used as a method of payment by consumers, although businesses tend to use other methods.
•
Cheques: A cheque is a slip of paper filled in with information and signed by an account holder. It tells the bank what the account holder wants done with his or her money.
•
Payment cards (debit cards): These are cards issued to customers by banks and other financial 237
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Section IX Accounts and financial services organisations. They enable the rightful holder to make payments and purchases without having to use cash or a cheque and to debit the charge direct to their bank account. •
•
Credit cards: These enable the holder to make purchases without the use of cash or cheque and to pay the amount involved at some later time. There is an interest rate attached to credit card use. Standing orders: This is an order given by an account holder to his or her bank to transfer a certain sum of money to another account at regular intervals.
•
Credit transfer: This is a method of transfer of money from one account to another without the use of cash or cheque, and where the amount involved may vary with each payment.
•
Bank draft: This is in effect a kind of cheque drawn on a bank rather than an account holder, although it will have been raised by an account holder and paid for in advance.
•
Letters of credit: This is an undertaking by a bank to honour bills of exchange drawn up against it to a specified amount, provided certain conditions are met, for example, imported goods are supplied by a specified date.
•
Electronic transfer: Money can be transferred from one account to another electronically. For example, a customer in a shop can pay for purchases directly from their bank account into the account of the seller. The seller can also make payments to their supplier in a similar manner. A business may pay its employees’ wages by electronic funds transfer (EFT) straight into each employee’s bank account.
The bank current account (sometimes referred to as a cheque account) makes the transfer of money from one person or one business to another very simple. The account is opened by paying into the bank a relatively small amount of money. After satisfying certain criteria and providing a specimen signature, the account holder is issued with: •
a credit or paying-in book to pay money into the account
•
a cheque book to enable the account holder to transfer money from the account to someone else, or to draw out cash for personal use.
The specimen signature is important because it is used by the bank to compare with the signature of the drawer on cheques presented for payment by payees. This is done to prevent fraud. It is for this reason that it is important that the account holder always signs his or her name in the same way. The current account provides a place for keeping money that needs to be available for immediate (current) use. Some banks pay interest on amounts left in the current account above a certain minimum level, but this is not usually the case. The bank sends the account holder a statement of account (also referred to as a bank statement) from time to time or on request. This details all amounts paid into the account, how much has been taken out of the account by the various methods available, and the balance left in the account. The bank statement is examined later in this chapter. Charges are often made for each cheque issued by businesses, especially if the balance held in the account falls below a certain minimum. However, banks vary in the charges they make with this account and you should familiarise yourself with what rules currently apply in the banks in your country. By prior agreement with the bank it is possible to overdraw on a current account, that is to draw out more money than has been paid into the account. Interest is charged on the amount overdrawn. This is examined in more detail later. A joint account may be shared by two or more persons. In the case of a joint account the account holders can make a variety of arrangements for signing cheques. For example, cheques can be signed by any one or any two of a number of authorised signatories.
Paying money into a bank account Cash, cheques or postal orders (see later) are paid into an account using a paying-in book that contains credit slips (sometimes called paying-in slips). These are already printed with details of the account holder (e.g. the name of the business) and are filled in with details of the amount being paid in, and the way that it is made up, e.g. part cash, part cheques or postal
238
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15 Financial institution services
orders. Non-specific slips are also available at the bank if a customer forgets his or her personalised ones.
There are five entries written on a cheque by the drawer:
The bank cashier/teller or counter clerk will stamp and initial the credit slip, confirming receipt of the in-payment. The account holder will retain this record of in-payment to verify against the bank statement when it is received.
15.4 Cheques A cheque is a written instruction to the bank (the drawee) to pay money to the account holder (the drawer) or to another person (the payee). Most cheques are order cheques, which basically tell the bank to follow orders. Bearer cheques (in which the payee is not specified) are less common and mean the bearer has the right to the specific sum, which is not particularly secure. In fact, all cheques which are exchangeable for cash over the counter (counter cheques) are considered less secure than those that must pass through a bank account, and they are used less frequently today. An order cheque must be signed (endorsed) on the reverse by the named payee if he or she wishes to pass them on to someone else. From the foregoing you should realise that there are three parties to a cheque: the drawer (the person who issues the cheque), the payee (the person to whom the cheque is payable) and the drawee (the bank against which the cheques are drawn).
1
the date on which the cheque is written
2
the name of the payee
3
the amount to be paid, in words
4
the amount to be paid, in figures
5
the signature of the authorised drawer(s).
Can you understand why it is important that someone decides as soon as possible on a signature, and then always uses the same signature? Written entries on a cheque should be made in such a way that they cannot be easily altered. For this reason cheques should not be written in pencil or with a pen with ink that can easily be erased. Care should be taken to avoid leaving spaces where someone could write in something extra. Any spaces should be filled with a neat line (see Figure 15.1). If a mistake is made when writing a cheque, the error should be neatly crossed through, and the correct entry written in and signed by the drawer to show that it is his or her alteration and not a forgery. However, it is often best to destroy a spoilt cheque and write out a new one. Cheques may be open or crossed.
Open cheque An open cheque does not have two parallel lines drawn across it. It is uncrossed. The payee can do
Payee’s name 2012
Gibbs Bank
The counterfoil is provided for your own use
Speightstown Barbados
40 - 38 - 04
Pay
$
A/C Payee
$
100179
100179 Serial number of the cheque
40
3804 Sort code number
or order
Sort code number of branch of the bank where the account is held Amount to be paid (in both words and figures)
Ivor Solution
41144374 Customer’s account number
Drawer’s signature
Figure 15.1 Can you identify the five things written on this cheque by the drawer? 239
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Section IX Accounts and financial services
A/C Payee only This means that the cheque can only be paid into the account of the payee, but he or she can pay it into his or her account via any bank.
Not Negotiable
A/C Payee only Gibbs Bank, Guyana This means the same as the above, but further instructs that the cheque can only be paid in at a certain bank.
Figure 15.2 Examples of special cheque crossings. three things with an open cheque: •
pay the cheque into his or her own bank
•
exchange it for cash at the bank on which it was drawn
•
pass it to someone else by signing the back of the cheque (endorsing it).
Although an open cheque can be useful, it does have drawbacks because if the cheque were to fall into the hands of someone dishonest, he or she would be able to cash it ‘over the counter’ at the bank on which it is drawn. For this reason, banks prefer their customers to use crossed cheques.
Crossed cheque Crossed cheques are safer than open cheques because they must be paid into a bank account. In other words, they cannot be exchanged for cash, unless the drawer is obtaining cash for him or herself (this is explained later). The crossed cheque is paid into the bank and the funds cannot be accessed until the cheque has been ‘cleared’ – this takes 3–5 working days. Open cheques can be crossed by drawing two parallel lines vertically across them, but banks also provide cheques with the crossing already printed.
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The crossing ‘Not Negotiable’ acts as a protection against loss or theft and is a warning to anyone receiving such a cheque that he or she should be careful when accepting it. The reason for the warning is that if someone accepts a cheque crossed ‘Not Negotiable’ and it has been stolen, then the person accepting it is liable to refund the rightful owner with the amount shown on the cheque.
The crossing on a cheque is called a general crossing if nothing is written between the lines. But words can be written between the lines of the crossing to make it a special crossing. Refer to Figure 15.2 for examples of special cheque crossings and an explanation of their significance.
Dishonoured cheque A cheque is said to have been dishonoured (sometimes said to have ‘bounced’) when the bank has refused to pass it for payment. Under such circumstances the drawee bank will write ‘refer to drawer’ on the cheque and send it back to the collecting bank, which will in turn send it back to the customer (the payee). It is then the payee’s responsibility to find out from the drawer why the cheque has not been honoured. There are many reasons why a cheque may be dishonoured: •
The drawer may not have enough money in the account to cover the amount on the cheque.
•
The cheque may be incorrectly completed, e.g. unsigned, or the figures and words may differ.
•
The cheque may be out-of-date (‘stale’). The life of a cheque is six months.
•
The cheque is unsigned.
•
The signature of the drawer may be different from the example held by the bank.
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15 Financial institution services
•
The bank may have detected an alteration on the cheque.
Certified cheque/bank or manager’s cheque Sometimes a normal cheque is not acceptable, for example where payment has to be guaranteed, bearing in mind that funds take some time to clear through the banking system. A certified cheque is one that the drawer’s bank draws up and guarantees to pay. In other words, it will definitely be honoured (paid) by the bank. A charge for the certified cheque is made by the bank, and the cheque is signed by the bank manager (hence the name manager’s cheque).
Counter cheque A counter cheque is a blank bank cheque given over the counter by the cashier when an account holder has run out of cheques, or left their cheque book at home. The account holder would need to prove to the cashier that they are the account holder. They can then use the counter cheque to make a withdrawal from their account.
Post-dated cheque Sometimes there is a need to give someone a cheque made payable for some time in the future, and this is called post-dating the cheque. The bank will not pass the cheque for payment until the date written on it arrives.
Cheque guarantee card In some countries banks issue a cheque guarantee card to trusted customers. The bank which has issued such a card to its customer undertakes to pay cheques supported by the card, up to an amount which is displayed on the card.
Bank draft A bank draft looks like a cheque, but is in fact drawn on the issuing bank. Because bank drafts are drawn on a bank rather than an individual or a business, they are as good as cash because payment is guaranteed. They can be purchased from a bank by payment of the draft amount and a bank fee. Bank drafts are often used to pay overseas suppliers, and are issued in the foreign currency required for the payment in question.
15.5 The bank statement At regular intervals, or on request, the bank will send to the customer a bank statement (Figure 15.3). The bank statement is important because it provides a record of all transactions that have taken place with the bank since the last statement was issued. Amounts which reduce the balance in the account are shown in the payments/debits column, and amounts which increase the balance are shown in the receipts/credits column. As each payment or receipt is recorded, a new balance figure is shown in a third column. The bank statement also records standing order and direct debit payments/debits and credit transfers, that are described later. Also shown are service charges: this refers to the charges the bank has made for some of the work it has done. For example, some banks may charge a business customer for each cheque processed, whilst others charge a fee for the cheque book beforehand. Interest movements will also be recorded in the statement of account. Interest may be credited to the account due to a return received from certain types of investment, and money may be debited from the account as charges for services the bank has rendered (e.g. for each cheque issued, or overdraft facilities).
Bank statement reconciliation When account holders deposit money into their accounts they are in effect lending money to the bank – the bank owes money to its customer. When customers deposit money their account is credited (the balance is increased). When money is withdrawn the account is debited (the balance is reduced). When account holders receive their bank statements they will verify them against the records they have of deposits made and cheques and standing orders that have been issued. In spite of this inspection, the amount that bank customers think they should have in their account at a particular time may possibly not agree with their bank statement. There are a number of reasons for this as follows (the main one being time lapse). •
Cheques the drawer has issued have not yet been presented by the payee – e.g. you, the 241
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Section IX Accounts and financial services
Gibbs Bank
CURRENT ACCOUNT STATEMENT
Victoria Road, Georgetown, Guyana Summary for 4 Mar– 1 Apr 2012 Start balance $5,946.70 $2,950.35 Total in Total out $2,139.12 End balance $6,757.93
Account name Ms Ginny Pig Account number 70954331 Georgetown Branch
Miss Ginny Pig 323 Short Street GEORGETOWN Barbados Transactions Date
Description
4 Mar 4 Mar 5 Mar 9 Mar 10 Mar
Start balance Cheque Cheque Cheque Received DIV
12 Mar 13 Mar 19 Mar 20 Mar 21 Mar 24 Mar 25 Mar 28 Mar 1 Apr
Received GL Ltd Received A Lee Received Alcs Deposit Withdrawal Deposit Deposit Cheque Received Carter Payment Payment Teleph Service charges End balance
Details 102070 102068 102069 Credit transfer
Credit transfer Credit transfer Credit transfer Cash and cheques Cash machine Cheque Cash 102072 Credit transfer Standing order Direct debit
Money out (debits) 163.72 820.40 300.00
300.00 155.00 200.00 150.00 50.00
Money in (credits)
258.80
Balance 5,496.70 5,782.98 4,962.58 4,662.58
616.62 100.00 262.95 838.39
5,638.00 5,900.95 6,739.34
227.18 150.00
6,666.52 6,816.52
496.41
7,157.93 6,957.93 6,807.93 6,757.93 6,757.93
Note: Different banks may use slightly different terms on their statements. Ask your teachers, parents and friends to show you as many different kinds of statements as possible, or go to different banks and ask to see some samples.
Figure 15.3 Bank statement. customer, write a cheque for a pair of shoes but the shopkeeper has not presented it yet, so your bank doesn’t know about it yet. •
•
Cheques or cash have not been recorded by the bank system yet – e.g. you make a deposit at a branch other than your own and your branch doesn’t know about it yet. Cheques that have been paid in have not passed through the bank clearing process – e.g. you have
deposited cheques to your account but they have not yet been cleared and so your branch doesn’t know yet if the person who wrote you the cheque has enough money to cover it. •
Debits for bank charges which are unknown until the statement arrives – e.g. the bank has subtracted its charges but you don’t know yet.
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•
Direct debits have debited greater amounts than expected – e.g. a utility supplier has charged you more than you expected and you don’t know yet.
•
Interest charges or credits the bank has applied – e.g. the bank has put money into your account and you don’t know yet. You may have earned interest, or perhaps someone deposited money in your account for your birthday!
Some of these reasons for the difference between what is in the account and what the account holder expected are relatively easily explained. For example, where cheques have been issued but not presented the account holder simply needs to wait
for the missing cheque to be processed through the banking system. But where there are genuine errors the account holder will query these with the bank, and this is why it is important to keep records (e.g. cheque and credit slip stubs) for future reference. With businesses in particular, although for individuals too, there is a need to match (reconcile) the bank statement with what the firm’s business accounts or the individual’s records show. This will be done through a bank reconciliation statement (see Figure 15.4) that can take into account any of the above-listed possible reasons for the differences.
BANK RECONCILIATION STATEMENT 4 FEBRUARY 2012 Balance shown on statement 31 January 2012 Minus unpresented cheque: Cheque no. 13456 (bank not aware) Cheque no. 13501 (bank not aware)
$
$
3,546.5 0
153.00 136.50
Adjusted balance Plus
deposits not yet recorded by bank: 26 January (bank not aware) 28 January (bank not aware)
120.00 80.00
bank charges (customer not aware)
43.50
Balance as per cash book (or personal records)
Balance shown on cash book (or personal records) 31 January 2012 Add unpresented cheques: Cheque no. 13456 (bank not aware) Cheque no. 13501 (bank not aware)
$
bank charges (customer not aware)
Balance as per bank statement
2 4 3 .50 3 ,500.5 0
$
3, 500.5 0
153.00 136.50
Adjusted balance Minus deposits not yet recorded by bank: 26 January (bank not aware) 28 January (bank not aware)
2 8 9. 50 3,2 5 7.00
2 8 9. 50 3,790.50
120.00 80.00 43.50
2 4 3 .50 3,546.50
Figure 15.4 Bank reconciliation statement. 243
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Section IX Accounts and financial services
Procedure to follow when preparing the bank reconciliation statement 1
Look through the bank statement to see if there are any items that are not recorded in the cash book.
2
Write these items into the cash book on the correct side.
3
Tick off all items that are in both the cash book and the bank statement, making adjustments for errors.
4
Use the previous reconciliation statement for items belonging to any period outside the current period.
5
Balance the cash book.
6
Anything not ticked is either an unpresented cheque or outstanding deposits.
7
Prepare bank reconciliation statement by adding deposits.
15.6 Banking services In addition to bank account services and the cheque facilities, banks offer a wide range of services that are used by businesses not only to make payments to others but also to receive payments. It would be impossible to include all of these services here, but the most important ones are as follows.
Standing order If an individual or business has to make a number of monthly payments of a fixed amount (e.g. for purchase or lease of equipment by monthly instalments), it can be advantageous to set up a standing order. The standing order consists of an instruction to a bank (by the drawer) to pay a fixed amount to a named individual or company (the payee) at a fixed date each month until the end of a fixed period of time or until further notice. The bank will automatically transfer the funds each month from the account of the firm initiating the order direct into the account of the other party they have been
instructed to pay. This saves the account holder from the inconvenience of having to remember to make the payments. The bank has to be given fresh instructions to change the amount of the payment.
Direct debit This is a variation of the standing order service. Instead of bank customers instructing the bank to make regular payments on their behalf, they complete and sign a form which gives permission for someone else (the payee) to withdraw amounts from their account at regular intervals. The amount withdrawn can be varied by the payee and the variations notified to the account holder (the drawer) at some later date. This service is suitable for repayments of credit where the repayment amount varies. For example, with some forms of credit (e.g. a mortgage), the amount to be repaid varies as the interest rate changes. Businesses sometimes pay energy bills (e.g. electricity supply) by this method, and the amount to be paid will vary depending on how much is used. Under these and similar circumstances the standing order service would not be suitable but the direct debit method is. Both the standing order and the direct debit systems have dual benefits for businesses. They not only make it easier for businesses to make regular payments, but also help them to receive payments from their customers.
Credit transfer Credit transfer is a method of transferring money from one bank account to another without the use of cheques. There are two basic methods of credit transfer – the single transfer and the multiple transfer. Single transfer method A form is completed with the details of the person or company to be paid and the details of their bank account. The drawer’s bank will then transfer the payment from the drawer’s account to the account of the payee, and the transaction will eventually be recorded on the bank statement of both drawer and payee.
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Multiple transfer method Using this method, the customer writes out a single cheque, or gives the bank permission to withdraw a single amount from his or her account and then use this to make several payments. For example, a private individual may want to pay several bills, or a business may want to pay the wages of many employees. A list or schedule is passed to the bank by the drawer, showing details of a number of accounts to be credited by direct transfer – e.g. the details of the bank accounts of each employee. The bank uses the drawer’s cheque made out in favour of the bank or withdraws the total amount from the account. The bank then credits each of the accounts listed in the schedule, thus saving the account holder the necessity of writing out many cheques. It should be noted that the drawer and the payee do not have to have accounts at the same bank in order to use this facility.
Bank cards Earlier in this chapter we mentioned the cheque guarantee card which is used in some countries. In addition there are other cards which help businesses to make and receive payments.
A bank customer might use a credit card to make many purchases in a month and then settle the total debt by writing out one cheque or credit transfer, thus reducing both the number of entries on the account and bank charges. Automatic teller machine (ATM) card Bank customers may request an ATM card to complement their bank current account. The card allows the holder to withdraw cash from his or her account at any time of the day or night, seven days a week. This withdrawal is made from an ATM machine which may be situated at banks, service stations and shopping malls. The account holder is given a PIN (personal identity number) for use in conjunction with the card. Keying this number on the keypad at the cash dispenser gives the card holder access to his or her account; therefore, it is important to keep the PIN a secret. It is best to memorise the number rather than write it down where it might be seen by others. To operate the cash dispenser, the card holder inserts the card into the machine. The card shows the holder’s account number, and this can be read by the machine and relayed to the bank computer. When the customer keys in the PIN, the computer
Credit card A credit card enables the holder to buy goods or services from a trader without using cash or cheque. These cards are issued by banks, but they are also provided by companies that specialise in credit/ charge cards, such as American Express. The purchaser presents the card to the trader and signs a voucher when making a purchase (Figure 15.5). The trader claims the money from the issuers of the credit card and has the amount credited to his or her account (minus a service charge).
DEC 09.12
JENNY’S RESTAURANT ST LUCIA, WI 01 938101444800000 APPROVAL CODE 975888
F.WILLIAMS 92157347863712 CARIBCARD
00/12
SALE 191529
50048786
FOOD AND BEVERAGE BASE AMOUNT
647.09
TIP AMOUNT TOTAL ECO
Eventually the holder of the credit card will receive a statement of account from the issuers of the card, which he or she can settle by one payment, or alternatively can pay monthly interest on any outstanding balance.
X I AGREE TO PAY ABOVE TOTAL AMOUNT ACCORDING TO CARD ISSUERS AGREEMENT (MERCHANT AGREEMENT IF CREDIT VOUCHER) TOP COPY-MERCHANT BOTTOM COPY-CUSTOMER
Figure 15.5 Example of a credit card voucher. 245
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Section IX Accounts and financial services checks that it is correct for the account to which the card corresponds. If the entered PIN is correct, then the dispenser will issue the money requested. The customer’s account is automatically debited with the amount withdrawn. The machine will also provide information such as the current account balance. Deposits can also be made at the ATM and ministatements obtained.
Bank overdraft
If the PIN is incorrectly keyed into the cash dispenser (e.g. by someone who has stolen the card), after a few attempts by the user, the machine will retain the card and tell the user to find out from the bank why it has been retained.
The overdraft is particularly useful where bank customers do not know exactly how much they need to borrow, or how long they need it for. The amount of interest charged is calculated daily on the actual amount for the time the account is overdrawn only. So, if any deposit is paid into the account it has the effect of reducing the overdraft and the charges involved, whilst any cheques paid out increase it.
Debit card Some ATM cards also act as debit cards. Many banks issue customers with a debit card. This is a multi-function bank card – it can be used as a cash dispenser card (up to the maximum daily amount set by the bank), and it may also act as a cheque guarantee card (up to a maximum amount shown on the card). The debit card can also be used to make instant transfers from the card holder’s account to another (up to the maximum amount held in the account). The debit card is frequently used to make purchases in a shop that operates electronic funds transfer facilities. It is often referred to as a payment card when it is used to pay for items in a shop. It should not be confused with a credit card, where payment is deferred. Payment takes place immediately.
Borrowing from a bank There are basically three main methods of borrowing from a bank: overdraft, loan and an interim loan (referred to as a bridging loan in some countries). Banks often require some form of security (called collateral) to safeguard against possible non-repayment of the amount owed. Collateral can take many forms, e.g. property deeds, stocks and shares, items of capital equipment and valuables. The items of collateral are sold by the lender in the event of the debt not being repaid.
With the permission of the bank, customers may write out cheques for more money than they have in their current account up to an agreed amount, which is the value of the overdraft. In such circumstances it is sometimes said that the customer’s account is overdrawn or in the red.
In order to calculate overdraft charges it is necessary to know the annual percentage rate (APR) the bank is charging. APR is the percentage interest rate the bank would charge if the overdraft were kept outstanding for the whole year. In order to calculate the daily charge the following formula is used: Amount overdrawn 100
APR 365
number of days
Bank loan In the case of a bank loan, the bank transfers the total value of the loan to the borrower’s account, and interest charges are incurred even if the borrower does not use all of the loan. Repayment, including the interest charge, is made in set amounts at regular intervals (e.g. monthly) over the period the loan is to run. The bank will only make a loan available to applicants whom it feels are suitable borrowers, and in the case of large loans will require collateral to be made available. Interest is charged on the whole amount for the whole of the time, whilst on an overdraft it is charged only on the amount outstanding for the time it is outstanding. The bank loan is a more suitable method of borrowing money when the required amount and length of time required for repayment are known, because the annual rate of interest on a loan is likely to be lower than on an overdraft.
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Interim loan (bridging loan) An interim loan (bridging loan) is provided by a bank (or some other financial institution) as a temporary measure for a relatively short period of time, e.g. a few weeks, until other expected funds become available. For example, a business might need a bridging loan to give it cash flow to purchase production materials whilst it is awaiting payments to arrive from its customers.
Miscellaneous financial services Although the main business of banks is holding money on behalf of customers and granting loans and overdrafts to individuals and businesses, they also provide a wide range of other services that can only be summarised here. Financial advice Banks employ specialist personnel who give advice to both private and business customers on a wide range of financial issues, including taxation and investment.
payment. By accepting the bill, the customer has made a legally binding agreement to pay. Although this procedure does not guarantee payment, it is easier to enforce than a normal debt. Night safe Bank customers in many countries can make arrangements with their banks to have access to a night safe, which is built into the wall of the bank. The customer is given a special bag. The bag has two keys – one is held by the customer, the other by the bank. The customer puts cash and cheques in the bag, together with a completed credit slip, locks the bag and puts it into the night safe. The next day the bank can use its key to open the bag and process the contents.
Post office There are some payment methods that are issued by organisations other than banks, e.g. post offices, but which are accepted by banks as credit; these are as follows:
Purchase of stocks and shares
Postal orders
Banks have their own brokers to buy and sell stocks and shares on behalf of their customers. They will also give advice and information related to company performance.
These can be purchased from a post office and cashed at another post office or paid into a bank account. They are used very little in business transactions, particularly because they are only useful for relatively small amounts of money. A crossed postal order must be paid into a bank or savings account.
Letters of credit These are sometimes used by a business that wishes to buy goods abroad, but which is not known to the foreign seller. A bank will establish a credit of the required sum of money at another bank in the country of the supplier. This sum is then paid to the supplier on proof of despatch of the goods. These are called letters of credit because the supplier is advised of the arrangements made in the form of a letter. Bill of exchange This is a document that is drawn up by the supplier and sent to the customer (frequently overseas). The customer accepts the bill by writing his or her signature (and company stamp) across the face of the bill. When the bill matures (when the time specified in the bill is up), it is presented to the customer for
Money orders These are also purchased from post offices and are used to make payments of larger sums than postal orders. A money order is an order from one post office to another to pay a named person the amount specified on an application form. The application form states the name and address of the payee, the amount to be paid and the post office at which the money is payable. After paying the amount due (including service charges) the sender posts the receipted form to the payee who can collect the money from the named post office, having provided proof of identity.
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Section IX Accounts and financial services Telegraphic money orders These provide a quicker method of transmission of money orders.
Credit unions A credit union is an organisation of people who pool their savings in a common fund. These bodies provide loans to their members for a variety of purposes at low interest rates. The aim of credit unions is to improve the financial conditions of ordinary people by offering financial services in a flexible way, and at a reasonable cost to members.
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15.7 Things to do
19
What is a certified cheque? Why is it also referred to as a bank cheque or a manager’s cheque?
20
Give one reason why a cheque might be postdated.
21
What is the purpose of a cheque guarantee card?
22
List the kind of information that is shown on a bank statement.
23
Why is it sometimes necessary to reconcile a bank statement? How is this done?
24
Explain the similarities and the differences between a standing order and a direct debit.
Make a note of it Write or key the following questions and their answers to provide revision notes. 1
How does a central bank differ from a commercial bank?
2
In what way can an investment company support other businesses?
3
How do insurance companies ‘offset risks’?
4
When might a business use a bureau de change?
5
What do you consider is the main facility provided by banks for both businesses and individual customers?
25
Describe the two methods of credit transfer.
26
How does the credit card system work?
6
Why is a deposit account not really suitable for holding money that is needed for everyday use?
27
7
What is ‘current’ about a current account?
How does the ATM system help to ensure that someone cannot fraudulently take money out of someone else’s account?
8
How does a current account make the transfer of money from one person to another easy?
28
What are the functions of a debit card?
29
9
What is a joint account?
Clearly explain the difference between a bank loan and a bank overdraft. Give examples when each would be used in preference to the other.
10
‘Interest can be seen as both a charge and a reward.’ Explain this statement.
30
What is an interim loan? Why do you think it is called a bridging loan in some countries?
11
What is a cheque?
31
12
List the things that are written on a cheque.
How do letters of credit and bills of exchange assist a business engaged in foreign trade?
13
Clearly explain the terms drawer, payee and drawee.
32
Describe some of the main post office moneytransfer services.
14
Explain the basic difference between an open cheque and a crossed cheque.
15
Why is a crossed cheque safer than an open cheque?
16
Use simple diagrams and explanations to show the difference between a general and a special cheque crossing.
17
What is a dishonoured cheque?
18
Why might a cheque be dishonoured?
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Section IX Accounts and financial services
Key words
3
If a bank customer wants to pay a fixed amount to a trader every month, the service used is called: a credit transfer b direct debit c standing order d fixed payment
4
A summary of all the transactions of a bank account is shown on: a a bank account b a bank overdraft c a bank draft d a bank statement
5
A cheque dated seven months ago is: a a post-dated cheque b a stale cheque c an endorsed cheque d a dishonoured cheque
Write a sentence for each of these words to show that you understand its meaning in a business context. Underline the key words in your sentences. 1
credit
2
ATM
3
collateral
4
signatory
5
overdrawn
6
endorse
7
balance
8
cheque
9
PIN
10
bank statement
Structured questions
Exam practice questions Choose one correct answer from the alternatives given.
The following questions are divided into subsections of varying degrees of difficulty. Answer the parts of the question you are able to.
1
The difference between the amount borrowed from a bank and the amount repaid is known as: a debt b credit c overdraft d interest
1
2
If a firm wishes to pay all of its many workers using just one payment from its account, it will use the following bank service: a credit transfer b direct debit c standing order d money order
Table 15.1
Refer to the bank loan data in Table 15.1. a Explain the meaning of the word collateral. (1) b Give two examples of business collateral. (2) c What is meant by annual percentage rate 22.8 per cent? (2) d If a firm wanted to borrow $8,000 to be repaid over a period of 18 months, how much would it have to repay each month, and what would the total interest be over the period of the repayment? (2)
Any Bank Ltd – loan table for annual percentage rate of 22.8 per cent $
$
$
$
$
$
Amount of loan
300.00
400.00
500.00
600.00
700.00
800.00
Total payable
351.63
468.84
586.05
703.26
820.47
937.68
19.54
26.05
32.56
39.07
45.59
48.84
Monthly repayment
Period of loan: 18 months. Information required from a business borrower to support application for a bank loan: copy of balance sheet for last financial year; details of collateral offered, purpose of loan.
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e
f
2
a b
c
d
3
Give a reason for each of the items of information this bank requires before it will grant a business loan. (3) Describe fully the difference between a bank loan and a bank overdraft, and give examples of when a business would use one in preference to the other. (10) Under what circumstances might a business use a bridging/interim loan? (2) A company wishes to purchase a new vehicle, which it is prepared to buy outright. The motor trader says he would prefer a bank draft rather than a cheque. Why would he say this, and how could it enable the company to get the vehicle more quickly? (4) Describe three different reasons why a business might issue its sales representatives with a credit card, for which the company would meet all the charges debited. (6) In each of the following cases give two different examples of a situation where a business would use the following bank services: i multiple credit transfer ii direct debit iii letter of credit iv bank draft (8)
Refer to the bank statement shown in this chapter as Figure 15.3 and answer the following questions: a Name the holder of this account. (1) b What period does this statement cover? (1) c Why does a business need to receive bank statements regularly? (2) d Since the date of this statement Ms Pig has written cheques for $28.40, $96.00 and $136.89. A direct debit of $189.27 has also been paid. Reconcile this bank statement to find out what funds Ms Pig really has access to. Show all your working out. (4) e Explain the functions of the debits, credits and balance columns, using figures from the statement to illustrate your explanation. (6) f Explain the difference between the services shown on this statement as direct debit and standing order, and give examples of how a business might use each. (6)
4
Refer to the cheque shown as Figure 15.1 in this chapter and answer the questions given here. a Which type of bank account would this cheque be used in conjunction with? (1) b State one way in which the crossing of this cheque could be made more specific. (1) c Identify two ways in which the drawer of this cheque has tried to ensure that someone cannot fraudulently change the amount to be paid. (2) d How could this cheque be endorsed and what would be the purpose of doing this? (2) e Identify the drawer, the payee and the drawee of this cheque. (3) f State three factors that the bank will take into account before passing Ivor Solution’s cheque for payment. (3) g Explain the difference between a stale cheque and a post-dated cheque. (4) h Which type of bank account would a business use most? Give reasons for your answer. (4)
Research assignment Carry out the following assignment to practise for your school-based assessment. 1
Create an A4-size diagram of a blank crossed cheque on white paper using a landscape format.
2
Enter the following information on to the cheque: • today’s date • the name of a friend as payee • your printed name and signature as drawer • a payment of $25,137.85.
3
Turn the cheque crossing into one that will ensure that your friend can only pay it into a named bank in your local town.
4
Mount your cheque on to a sheet of A3 white paper, in a central position, with both pieces of paper displayed in A3 format.
5
Around your cheque add explanatory labels and connect them to the appropriate parts of the cheques with arrows from each label to the significant parts of the cheque. The purpose of the labels is to identify important features of a cheque (both printed and handwritten items). 251
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Section IX Accounts and financial services 6
Cheques have magnetic ink characters printed on them. Find out the functions of these sets of characters and include them in the labelling of your illustration.
7
What happens to a cheque between the time it is passed from the drawer to the payee until the amount due is actually credited to the payee’s account?
8
Go to several different banks and collect leaflets, then make a comparison of the services offered and charges involved.
252
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NEW EDITION
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