Chapter # 2

Banking: Payments and Receipts

Contents

 Different methods of payments and receipts

 The banking system
 Questions
 Answers

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 1. Methods Of Payments:
Different methods of payments and receipts are used. The methods may vary according to nature and size of
transaction.
Following are the method of payments and receipts:
 Cash
 Cheques
 Plastic Cards
 Electronic Funds Transfer At The Point Of Sale (EFTPOS)
 Bank Automated Clearing System
 Credit Transfer Or Bank Giro Credit
 Standing Order
 Direct Debit
 Bank Draft
 Pay Order

i. Cash:

What Used at Problem Controls

Piece of paper or Small business for Cash handling  Don’t use cash for larger transactions.
metal which has small transactions.  Don’t keep cash in business premises.
legal or economic  Bank promptly
value.
Cash security Use
 Security Guards
 Security Cameras
 In-house security system
 Night Safes
 Vaults
 Security firms to pick cash from business premises
to bank

Fraud or Error  Segregation of duties: Divide a Job into different

tasks and use different persons for different tasks
i.e one persons receive the cash the other records
it and any other bank the cash.

 Never send cash through post

Other Terms:
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.
Cash Register: is the book where all transactions relating cash are clearly stated in accordance to the dates
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 ii. Cheque:
c) ____________
a) ____________ b) ____________
d) ____________

e) ___________

f) ___________

i) ___________ h) ___________ g) ___________

j) ___________

 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

What Used at Problem Controls

an unconditional Large business May lost  Use cross cheque (payee’s a/c only).
order in writing for large
 Lost cheque must be stopped by calling
addressed by a transactions.
the bank and then confirm this instruction
person to a bank,
in writing
signed by the Could be sent May dishonor:
person giving it, through post and Reasons
requiring the bank could be
to pay on demand stopped.  Insufficient balance
 Use Cheque Guarantee card
a sum certain in
money to or to the  Date expired
order of a specified
 Fill properly
person.  Improperly filled or Signs
not matched
Other security procedures are:
 Chequebooks must be kept separate
 The number of cheques in a book must be
kept minimum

Cheques are less easily exchanged by a thief

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 Cheque Guarantee Card
 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
 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

HMB Bank
473216 3391140209761

Ali Ahmad $100 Ali Ahmad

20-27-63 4971528468 01/X7 01/X9
Sort Code Account Number Valid From Expires

Front Rare
Cheque Endorsment: A cheque 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.

iii. Plastic Cards:

There are two types of plastic cards,
 Debit Card
 Credit Card
I. Credit Card:
 Customer is provided with the credit facility
 If payment is not done within specified period, interest is charge on overdue amount
 No need of Account
 Annual membership fee by credit card company
 Credit limit may vary person to person
 The three parties involved in a credit card are cardholder, card issuer and third party
II. Debit Card:
 Issued by bank to account holder
 No concept of credit
 The amount is deducted from the customer’s bank account and is transferred to supplier’s account

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  Transaction will not be processed unless the customer’s account has sufficient funds
 The customer signs the voucher at the point of sale

a) ___________ b) ___________ c) ___________

a) ___________

e) ___________ d) ___________

Front Rare

III. 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.

Security Checks:
When accepting payment through Plastic cards 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

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

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 iv. EFTPOS

 Electronic Funds Transfer At Point Of Sale is a means of allowing a transaction to be recorded

immediately on customer bank accounts
 There is no need to keep cash in hand
 It makes possible the automatic transfer of funds from a customer’s 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

v. BACS(Bank Automated Clearing System)

 Bank Automated Clearing System is used to pay salaries and wages to the employees in an
organization
 It is a quick and secure form of payment

vi. Bank Giro Credits (Credit Transfers)

 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 business’s bank statement
 Bank charges fee for all the above provided services

vii. Standing Order

 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:
o The fixed amount of each payment
o The frequency of each payment and the due date
 Banking details of the supplier to whom the payments has to be made
 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.

viii. Direct Debits

 Direct debits are normally used to pay utility bills

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  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

ix. Banker’s 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

x. Pay Order
 This form of payment is used within city
 It is a guaranteed form of payment
 Once issued cannot be stopped

2. The Banking System

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The bank could be divided into two major categories

The Central Bank The commercial/retail/Clearing Bank

Central Bank is the bank which controls the banking Commercial bank is the bank which deals with the
Industry. customer.

In UK The Bank Of England is the central bank. Barclays, HSBC, NatWest are the examples of the
commercial bank.

The clearing System: Clearing is the mechanism for obtaining payments for cheques.
It normally takes three working days for a cheque to process.

Other Terms

Paying in Slip or Deposit Slip: When a customer deposits cash or cheque to the bank, the customer
receives the slip, this slip is known as deposit slip or paying in slip.

Bank Statement: Bank statement is a detailed statement which includes records of transaction of customer
account with the bank.
The statement is normally sent monthly.

Bank Mandate Form: Bank Mandate Form is the form that specifies the names and specimen signatures of
individuals empowered to sign cheques supplied to a bank.

Overdraft: A facility provided by bank to its account holders. That the account holder may withdraw money
even above than his balance.

2.1 Customer/Bank Relationship:

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.
1. Receivable/Payable
2. Bailer/Bailee
3. Principal/Agent
4. Mortgagor/Mortgagee

1) Receivable/Payable:
This is when a customer deposits money in the account. Customer is receivable and bank is payable.

2) Bailer/Bailee:
This relationship exists when a bank offers a safe deposit service to customers, which allows use of
bank’s strong room or safe.
When it accepts the customer’s property, bank has the following obligations
 To safeguard the items held
 To redeliver them on demand
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 The customer is the bailor, the bank is the bailee.
3) 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.
4) Mortgagor/Mortgagee:
This relationship arises when a customer asks a bank to give a loan secured by a charge or mortgage
over the customer’s 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.

2.2 The Rights and Duties Of Bankers And Customers

Rights and Duties of Banks
 Making charges or commissions
 Using customer’s money
 Demanding repayment of overdrawn balances
 Possess security for loans
 Honour a customer’s cheque
 Receipt of customer’s funds
 Repayment on demand
 Comply with customer’s instructions
 Provide a statement
 Confidentiality except: Required by law, public duty or consent of customer
 Advise of forgery
 Care and skill
 Closure of accounts (notice)
Duties of Customers
 Ensuring that fraud is not facilitated when drawing cheques
 Indemnifying the bank when it acts on behalf of the customer

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MULTIPLE CHOICE QUESTIONS
1) Customers have obligations to their bank. Which one of the following is a customer’s obligation?
A. To repay the amount of their deposits on demand
B. Not to disclose any information regarding the affairs of the bank
C. To use a professional level of care and skill in dealing with their accounts
D. Not to draw up cheques in a way to facilitate forgery
2) Why might a bank return a cheque to the payee?
(i) When it is more than six months out of date
(ii) When it is unsigned
(iii) When the account holder has insufficient funds to cover the cheque
(iv) When the cheque is crossed ‘A/c payee’ and the named payee presents it
A. (i), (ii) and (iii)
B. (i), (ii) and (iv)
C. (i), (iii) and (iv)
D. (ii), (iii) and (iv)
3) What is the effect of a cheque guarantee card for a customer?
A. Cheques guaranteed need not go through the clearing system
B. Cheques guaranteed within the card limit may not be dishonored
C. It is evidence that an individual is authorized to sign business cheques
D. It enables someone other than the account holder to sign a cheque
4) Which payment form allows a purchaser to immediately transfer money from her bank account to the seller’s bank account?
A. Bank guarantee card
B. Charge card
C. Credit card
D. Debit card
5) Which form of automated payment would be better in paying wages to employees?
A. BACS
B. Credit transfer
C. Direct debit
D. Standing order
6) In which of the following case would a different form of payment be requested for the purchase of goods costing $40.
A. When a customer pays by cheque under a valid cheque guarantee card
B. When a customer’s credit card company states that the transaction would exceed his credit limit
C. When a customer pays by $1 and $2 coins
D. When a customer is only able to pay by debit card
7) What is the explanation of the bank clearing system?
A. Agreeing a loan or overdraft between bank and customer
B. The transfer of cheques between the payee’s bank to payment at the drawer’s bank
C. The electronic transfer of funds enabling a supplier to be instantly paid by debit cards
D. Checking customer references before they are given a credit card
8) What is common between a bank and customer?
A. Account number
B. Cheque number

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 C. Drawee
D. Sort code
9) David makes a regular monthly payment from his bank account to his daughter’s bank account to cover her living expenses
while she is at university. What method of payment is David using?
A. ‘Account payee’ crossed cheque
B. BACS
C. Direct debit
D. 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. The bank
B. The partnership
C. The payee of the cheque
D. 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. Ensuring that the employee taking the cash to the bank or night safe is accompanied by another employee
B. Not always going to the bank or the night safe at the same time of day or by the same route
C. Using the same responsible employee to take the cash to the bank
D. Using a security firm to transport the cash to the bank if necessary
12) The name of the person who signs the cheque is:
A. The drawer
B. The drawee
C. The payer
D. The payee
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. An endorsement
B. A cheque guarantee
C. A crossed cheque
D. 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. A debit card
B. A credit card
C. A charge card
D. A cheque guarantee card
15) 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

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16) 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
17) 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 payee’s 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
18) 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
19) 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
20) A document accompanying a cheque payment to a supplier, detailing the invoices being paid is called a:
A. Supplier’s statement
B. Debit note
C. Remittance advice
D. Remittance list
21) EFTPOS means:
A. Electronic Financial Transaction for Purchase of Stock
B. Electronic Funds Transfer at Point of Sale
C. Electronic Financial Transaction at Point of Sale
D. Electrical Funds Transfer for Purchase of Stock
22) Which card will normally be requested to accompany a payment by cheque?
A. Credit card
B. Cheque guarantee card
C. MasterCard
D. Store card
23) What details on a credit card should a cashier check when they receive a payment for goods?
(i) It is signed
(ii) It is valid at that day’s date
(iii) It has not been altered/tampered with
(iv) It is issued by a bank
A. All
B. (i), (ii) and (iii) only
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 C. (i) and (ii) only
D. (ii) and (iv) only
24) What is meant by ‘The UK central bank’?
A. Head office of a major bank
B. City centre branch of a bank
C. Bank of England
D. Royal Mint
25) In how many days would a cheque between banks clear through the UK clearing system?
A. 7 days
B. 5 days
C. 10 days
D. 3 days
26) Which of the following states a contractual relationship between a bank and its customers?
(i) Debtor/Creditor
(ii) Principal/Agent
(iii) Mortgagor/Mortgagee
(iv) Bailor/Bailee
A. All
B. (i) and (iv) only
C. (i) and (ii) only
D. (i), (ii) and (iii) only
27) Which of the following are the duties of customers towards their bank?
(i) Promote the bank’s services
(ii) Not encourage fraudulent activities
(iii) Not to misuse any cheque guarantee card
(iv) Not to open an account elsewhere without notice
A. All
B. (i), (ii) and (iv) only
C. (ii) and (iii) only
D. (i), (ii) and (iii) only
28) Which of the following documents would be required when paying in the daily takings to the bank?
(i) Cheques received
(ii) Copy credit card vouchers
(iii) Cheque remittance list
(iv) Copy credit card summary
A. (i) and (ii) only
B. (i), (ii) and (iv) only
C. (i), (iii) and (iv) only
D. All
29) What is needed to ensure a cheque to be properly authorized?
A. Sufficient money in the bank
B. Evidence of an underlying transaction and an approved payment

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 C. A receipt stapled to an invoice
D. A remittance advice and the accompanying statement from supplier
30) Which of the following is a valid method of making payment?
A. A credit card in excess of its limit
B. A cheque on which the amounts in words and figures differ
C. Cash
D. Barter
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. Ask the customer to make payment by some other means
B. Authorize an increased debit card limit for the customer
C. Call the police and have the customer arrested
D. Let the customer take the goods and come back later to make payment
32) Which one of the following is included in a bank statement?
A. The transactions on the bank account of a business
B. The transactions between customer and supplier
C. Petty cash transactions
D. Transactions on a company credit card
33) Which of the following is least likely to be a duty of a bank towards its customer?
A. To use a professional level of care and skill
B. To provide confirmation of the balance on the account at any time at the request of the customer
C. To provide a statement covering a period showing the transactions which have occurred during that period
D. To provide a statement detailing the profits the bank has made with the money the customer has deposited
34) Which of the following is not an effective security process?
A. A key must be inserted in to the cash register before it will operate. Keys are held by authorized personnel
B. Cash is counted by a responsible person who works on the cash register
C. The cash reconciliation should be performed by a responsible person who neither operates the cash register nor
counts the cash
D. Cash should be banked as promptly as possible
35) In which of the following case will a bank refuse to accept?
A. An unsigned cheque
B. A crossed cheque made out to the person presenting it
C. An account payee cheque paid in by the named person
D. A large amount in notes
36) EFTPOS is best explained as:
A. A system of payment for goods and services via electronic funds transfer at point of sale
B. A system of electronic payment by debit card
C. A system of electronic payment by credit card
D. An electronic system that a business can use to monitor its cash receipts
37) A fiduciary relationship is best described as;
A. A contractual relationship
B. 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

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 C. Not recognized in law unless it is contractual
D. Between principal and agent
38) What is the reason of crossing a cheque?
A. To stop it being paid into an account other than the payee’s
B. To speed up the time it takes to go through the clearing system
C. To allow it to be paid into any account, not just the payee’s
D. To tell the bank to check that there is enough money in the account to pay it
39) 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. Draw up a cheque for signing, check invoice with goods received note, check invoice with purchase order, check
invoice calculation
B. Check invoice with purchase order, draw up a cheque for signing, check invoice with goods received note, check
invoice calculation
C. Check invoice with purchase order, check invoice with goods received note, check invoice calculation, draw up a
cheque for signing
D. Check invoice calculation, draw up a cheque for signing, check invoice with purchase order, check invoice with goods
received note
40) The bank mandate form is:
A. This is an instruction to a bank to make a payment directly to a supplier
B. A list of personnel within a company authorized to sign a cheque
C. Names and specimen signatures of individuals empowered to sign cheques supplied to a bank
D. A request to open a bank account
41) Which of the following is a characteristic of a bank draft?
A. It can be stopped after issue
B. It is signed by the directors of the company making the payment
C. It is a secure form of payment for the recipient
D. It provides a cheap source of finance for high value purchases
42) Which of the following is not a distinctiveness of a standing order?
A. Used to make regular payments from an account
B. The payment amount cannot be varied
C. The recipient of the payment initiates cash payment
D. The amount of payment remains the same
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
B 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
C. 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
D. Pass the voucher over the credit card using the imprinter
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 Check floor limit and seek authorization code
Give the voucher to the customer for signature
Write the details of the sale on the voucher
44) Which of the following best describes the EFTPOS system?
A. The organization can invoice 1st bank, electronically, for the value of goods sold in a trading period
B. EFTPOS acts as a from of on line validation of cheques rendered by customers
C. Funds are transferred automatically from a customer’s bank account to the organization’s bank, when goods are
purchased
D. EFTPOS system will initiate a payment to the organization at the end of a trading period
45) If a customer tries to make a purchase with a credit card in excess of a retailer’s floor limit:
A. The sale should be tactfully refused
B. The police should be called immediately
C. The sale should be accepted
D. The credit card company should be contacted
46) When Lee makes out a cheque for $50 and sends it to Young, then Lee is known as:
A. The payee
B. The banker
C. The drawer
D. The creditor
47) When banking money in your account, you should always use:
A. A cheque book
B. A paying in slip
C. A cash book
D. 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. When a customer has given permission to a third party to obtain a banker’s reference
B. When there is a public duty to make disclosure
C. When the bank suspects the customer is engaged in illegal activities
D. When disclosure is specifically required by statute
49) Which of the following need not be written on a cheque counterfoil?
A. The date of the cheque
B. The bank account number
C. The party to whom the cheque was made out to
D. The amount of the cheque
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. A cheque
B. A standing order
C. A direct debit
D. A debit note
51) Which of the following might be a reason why a shopkeeper grants credit to his customers?
A. He hopes to do more business if he allows his customers time to pay their bills.

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 B. He receives his money more quickly.
C. He is afraid of incurring bad debts.
D. He is afraid of handling large amounts of cash.
52) Which of the following is not a right of a bank?
A. The right to close a customer’s account at any time without notice.
B. The right to charge a reasonable commission for its services.
C. The right to repayment on demand of any overdrawn balance.
D. The right to expect the customer to user reasonable care in drawing cheques.
53) Faizal buys a new cricket bat and pays for it with his credit card; the bat costs $50.The following happens immediately:
A. Faizal’s bank account is immediately debited with $50.
B. Faizal’s bank account is immediately credited with $50
C. Faizal owes the credit card company $50
D. Faizal owes the credit card company $50plus interest.
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. Will receive its $30 as long as Bella has at least $30 in her bank account on the day the Cheque is written.
B. 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
C. Will receive its $30 as long as Bella has at least $30 in her bank account on the day the Cheque is cleared.
D. Will receive its $30 whether Bella has $30 in her account or not.
55) Debit cards work via the system known as
A. ACAPS
B. BACS
C. CHAPS
D. EFTPOS
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. That the date entered on the cheque is correct.
B. That the amount of money in words tallies with the amount of money in figures.
C. That the signature tallies with tat on the cheque guarantee card.
D. That the person’s account is in funds.
57) If a credit card is lost, what should the holder do?
A. Report the loss immediately to the credit card company.
B. Report the loss immediately to the bank
C. Report the loss to the bank on the next working day.
D. Nothing – the credit card company will know of the loss automatically.

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