Fundamentally, a deposit is money held by a bank or a financial institution that may be transferred from one party to another. It is essentially your money that you transfer to another party or use it to make purchases. It can also be the amount of money used as security or collateral for delivery of goods or services.
How deposit works.
When you deposit your money in a bank, you are safeguarding it. The bank promises to pay this money back to you as and when you need it. The deposit is your asset, and the bank owes you the amount you save and pays interest on it. The interest rate differs based on the type of deposit you make. This means that, at fixed intervals, a small percentage of the account’s total is added to the amount of money already in the account. Interest can compound at different rates and frequencies, depending on the terms of the bank. Banks usually offer creation of separate personal and business accounts. Business accounts are designed to meet the needs of businesses and like personal accounts allow for deposits and withdrawals but often have different (higher) limits.
Types of Deposits
There are two main types of deposits: Demand and Time.
- Demand deposit: A demand deposit is a conventional bank account or a savings account. From a demand account, you can withdraw money at your discretion anytime without advance notice either from the bank, its ATMs, or while paying for your expenses using the debit card provided by the bank.
- Time deposits: Time deposits are those deposits where your funds are locked away for a fixed term or time, for example a Fixed Deposit. Such accounts offer higher rates than a savings account. However, unlike a demand deposit, you do not have the option of withdrawing money whenever you want to. The money must be kept in the account for the set period. While there are no restrictions on demand deposits, banks may levy penalties for withdrawing a time deposit prematurely.
Example of Deposit
Here are two hypothetical examples of common bank deposits.
Example 1
Suresh is a customer at XYZ Bank. He wants to deposit Rs 5000 in cash into his savings account. He visits his local branch and hands the money to the bank teller. The teller deposits the fund into his savings account. The money is now the bank’s asset. A week, later Suresh returns to the Bank and wants to withdraw Rs 500 in cash. The bank takes Rs 500 from their funds and pays the cash to Suresh. The bank has now decreased the amount they owe Suresh by Rs 500.
Example 2
Poonam opens a Fixed Deposit (FD) with XYZ Bank. She visits her local branch and explores her options. The bank offers different terms for its FDs. The longer the FD’s term, the higher the interest rate. Poonam opens a three-year FD. She deposits Rs 10,000 at 5% interest rate. During this time, the bank has Poonam’s funds. After three years, she can collect her money without penalty. She will receive her initial Rs 10,000 and the interest she accrued during the three years.
Conclusion
A deposit in finance is typically your money held by a bank or a financial institution for safekeeping or transfer to another party. Deposits in Banks help your money grow gradually. However, it can have other meanings as well. For example, you may need to place a deposit, or a certain amount of money, with a business to secure goods or services, such as house rent etc.
