Explains how bank accounts work, covering the difference between chequing and savings accounts, how deposits, withdrawals, and fees affect a balance, and how simple interest is calculated on savings, with worked step-by-step examples.
What is a bank account?
A bank account is a service offered by a bank or credit union that holds your money safely and keeps a record of every dollar that goes in or out. Instead of carrying cash, you can deposit money into an account, spend it using a card or cheques, and watch the balance change over time. Understanding how a bank account works is a key part of managing your income and savings.
Chequing accounts vs savings accounts
Most people use two main types of accounts, and each one serves a different purpose.
Deposits, withdrawals, and your balance
Every transaction changes the account balance. A deposit adds money, and a withdrawal (or a purchase, fee, or transfer out) subtracts money. To find the new balance, add every deposit and subtract every withdrawal from the starting balance.
Example 1: Priya's chequing account starts with a balance of \(250\) dollars. She deposits \(75\) dollars from a part-time job, then withdraws \(40\) dollars for a bus pass. What is her new balance?
\( 250 + 75 - 40 = 285 \)
Priya's new balance is \(285\) dollars. If several transactions happen in one statement period, keep a running total by applying each deposit or withdrawal in order, the same way you would if you were budgeting your money across a month.
How interest works on a savings account
A savings account pays you interest for keeping your money there. Simple interest is calculated using the formula \( I = Prt \), where \(P\) is the principal (the amount deposited), \(r\) is the annual interest rate written as a decimal, and \(t\) is the time in years.
Example 2: Marcus deposits \(500\) dollars into a savings account that pays \(2\)% simple interest per year. How much interest will he earn after \(1\) year, and what will his balance be?
\( I = 500 \times 0.02 \times 1 = 10 \)
\( A = P + I = 500 + 10 = 510 \)
Marcus earns \(10\) dollars in interest, so his balance after one year is \(510\) dollars. The formula for the new balance can also be written as \( A = P + Prt \), which factors out the principal.
Growth of a $500 savings deposit earning 2% simple interest each year.
Why the account you choose matters
Choosing between a chequing account and a savings account often depends on how you plan to use your money. Money you earn from a job, described further in the lesson on types of pay, might be deposited into a chequing account for everyday spending, while extra money can be moved into a savings account so it earns interest instead of sitting idle. Comparing interest rates, fees, and withdrawal limits helps you decide which account, or combination of accounts, fits your goals.
Quick checklist for balancing an account
When you check a bank statement, follow these steps:
1. Start with the opening balance for the period.
2. Add every deposit that occurred.
3. Subtract every withdrawal, purchase, and fee.
4. Add any interest earned, if it is a savings account.
5. The result should match the closing balance shown on the statement.