Types of Bank Accounts

Establishing what is best for business bookkeeping

Get to know what types of bank accounts are best for a small business, and how to use your chosen bank account in conjunction with your business bookkeeping.

An integral part of the success of a business is having the right type of bank account in place, but how do you know what type to go for? Does it make a difference if you are sole trading or a registered company?

Should you have different bank accounts for different purposes – such as one for payroll, one for paying the bills and one for other business transactions? Who should be responsible for having access to the bank account and check books?

First, let’s look at three main categories.

Within these categories you will find the main types of bank accounts available such as check/cheque account also known as current account, savings account and a few others which we get into further down the page.

Category 1 - Personal

Category 2 - Business

Category 3 - Internet

A personal bank account is great for sole traders

This does not mean mixing personal expenses with business expenses. This means keeping two separate personal accounts (strongly recommended).

One will be used only for their sole trading business to record its income and expenses, and the other for their personal earnings and out-goings like food and the home mortgage.

An individual can open several personal bank accounts under their name with the same bank - no need to be at separate banks unless desired - and no need to have a business name, but if the owner wants a business name to show on the check/cheque book this can be arranged with the bank. It might look like this:-

      John Smith trading as Mr Fix It

Bank fees on personal type accounts can be a lot less compared with business accounts, and can even be reduced to nil when using online banking, as explained further down.

The only problem with so many accounts in one name at the same bank is having several similar looking bank cards in the wallet to choose from when making purchases… gotta look carefully when shopping!!

Business accounts can be used by sole traders, partnerships and registered companies

Overdraft facilities on these types of bank accounts can be negotiated with the bank when there are extra bills to pay and money is tight.

These accounts are great when more than one person has to sign checks or needs access, particularly with online banking.

Banks often offer incentives for small businesses to open this type of account by offering reduced or nil fees for a length of time, or other small bonuses.

Business credit cards can be issued to selected staff members with restricted spending limits.

I could not imagine doing business without internet banking

It’s safe and secure, all the different accounts belonging to the individual or business can be viewed within one page.

With business accounts different members of staff can have access with their own login details and be given different levels of authority/viewing access to all the accounts. When bill payments need to be made, an electronic batch can be produced from the bookkeeping software and uploaded to the business account for one bulk payout.  Banks can provide a small electronic gadget for producing unique pin numbers which have to be entered into the account before payments are processed; a good security measure.

And of course, for people on the go mobile banking is available for mobile phones, i-pads etc.

There are several ways of reducing bank fees with internet banking, and on personal accounts having no fees at all by:-

1. stopping paper statements – it is easy to select a time frame and print the transactions for that time; some banks provide online statements, just click and download,
   
   
2. paying all bills online by direct credit instead of check,  and
   
   
3. encouraging customers to pay by direct credit because check/cash deposits incur fees when they have to be processed by a member of staff at the bank.

The business section of banks usually also provide loads of information for small businesses to help them get set up and running properly.

I also could not imagine maintaining the household banking and budget without online banking where I can view our daily transaction accounts, savings accounts, credit card accounts and home loan accounts, all in one place. It’s quick to login and move funds around from one account to another as needed.

Let’s look in more detail at the different types of bank accounts

Check Accounts – these are the daily transaction or working accounts for individuals and businesses for which check books are available. These accounts are not geared for earning interest because of the continuous movement of funds in and out.

Savings Accounts – the best place to keep extra funds and earn interest and in which movement of funds should be kept to a minimum. Withdrawals can cause high bank fees – an incentive to leave the money there to earn interest.

Term Deposits – a great way to earn high interest for a select period of time (6 months or more) during which the money is locked in and cannot be withdrawn. There is usually a minimum deposit for this term investment of, for example, five thousand.

Call Accounts – similar to term deposits these accounts may require a minimum deposit and a minimum balance maintained to earn interest but with more flexibility for withdrawing funds when required.

Trust Current Accounts – used by solicitors to receive funds from clients that will be allocated towards house settlements or domestic settlements, certain costs relating to legal cases, moved to call accounts to earn interest, or transferred to the solicitor’s business account for payment of fees. This type of trust account is like the daily transaction account and doesn’t earn interest.

Client Funds – this is used by solicitors to hold funds paid in by clients and which funds are not being immediately paid out for any settlements or costs. The funds are put onto call accounts in the name of the client to earn interest until such time as they are required.

Foreign Currency Accounts – these types of bank accounts are great for importers and exporters who pay or receive funds in another currency; interest can be earned but a minimum balance may be required.

So, how should these types of bank accounts be set up for use with business bookkeeping?

The best option for a small business is to have:-

1. One daily transaction account for all income and expenses
2. One savings account for setting aside funds for tax, and
3. A credit card (optional)

Large businesses that have different accounting departments like a payroll department, accounts payable department, accounts receivable etc. might chose to allocate one bank account for each department with one financial controller overseeing them all who ensures there are enough funds within each account.

However, our focus here is small businesses so that is what we will talk in-depth about.

Personal Bank Account  - There is only one login available on these types of bank accounts, which means the business owner and their employees have to use the same login and password. 
This leaves them vulnerable to mis-use unless the business owner has complete and utter trust in their employee. That is why these types of bank accounts are best suited to a one person business, that person being the owner! 

If the business owner wants their employee to have some responsibility for loading payments, then a business bank account is highly recommended.

Business Bank Account – different employees can be given their own logins. The bookkeeper of the business could be given access to view and download bank statements and transaction listings, and upload bill payments, but without the ability to authorize the payments.  

There should only be one person with authority to approve payments, such as the business owner, and approval should only be given after the payments have been thoroughly checked out.

Wages and salaries can be paid from the same account. Most payroll software programs can produce an electronic file for quick upload to the bank to make employee payments in one quick step.

With online banking, it is easy to print out a transaction listing each day and enter the information into the bookkeeping software:-

1. To keep the cash book and bank reconciliations right up to date.
2. To keep a good handle on accounts receivable so that the bookkeeper can phone customers right away if their promised payments do not show up in the account.

It is also possible to download a daily transactions listing in an electronic file to import the bank information to the bookkeeping software – most banks can provide this option.

In fact, there are new bookkeeping programs online that can be directly linked to your bank account and which can automatically update your cashbook every night; all that’s left for you to do in the morning is login to your bookkeeping software and reconcile each transaction.

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