Banking Operations

While talking about Income & Expenses, we mentioned about depositing money with the bank and taking a loan from it. Let us understand the basic ideas of banking.

What is a bank?

A bank is also a kind of business. In simple terms, a bank accepts money from people and then lends it to other people. It pays interest to people who deposit money with it. It also charges interest from people to whom it lends money.

The interest that people pay the bank is its income.

The interest which a bank pays people is part of its expenses. The bank also employs people who run the bank. The salaries paid to these staff are also part of the expenses of the bank.

The difference between the Income and expenses of a bank is its profit.

Interest

We have seen that interest is an amount that we pay for using someone else’s money. It is similar to the rent we pay for stating in someone else’s house.

The rent we pay is usually a certain amount of money like Rs 10,000. We also pay it every month or every year. It could be Rs 10,000 per month. Depending on the size of the house or its location the amount could be different.

The interest we pay is in money on a certain amount of money that we may have borrowed. The more the money borrowed, more should be the interest amount. The longer the time we keep the borrowed money, more the interest amount. Hence the interest we pay is usually denoted in terms of interest per Rs 100 and for a year. This is called the interest rate. 8% interest means that interest amount is Rs 8 per Rs 100 for one year. The interest amount for any amount and for any length of time is given by the formula

I = Pnr/100

The loan amount on which the interest is charged is called the Principal. “n” is the number of years for which the loan is taken and r is the interest rate, which has been explained above.

Banking Accounts

The bank also keeps an account book for the amounts we deposit, withdraw and interest earned. The amount that we have at any point of time is called the “balance”. The amounts we deposit & the interest that we earn increase our balance. The amounts that we withdraw, reduce the balance. We can get a copy of our account any time we want and check our balance.

Simple & Compound Interest

The interest we earn and is credited to our account is called “simple” interest. There is another kind of interest that we can earn which is called “compound interest”. Here the interest that we earn is added to the Principal at the end of the year and then for the next year, we get interest on the Principal & the previous year’s interest. So we get interest on the interest amount previously earned.