What is a bank account, and how do 12 million soum «travel» from one company to another?

The «Shirin tong» confectionery owed its flour supplier «Lolazor un» 12 000 000 soum. The accountant, Zarina, pressed a few buttons on her phone, and within a few minutes the payment was on its way. Nobody carried a bag, counted banknotes or set off for another town. So where did the money go from, where to, and how? This is exactly the question promised in the first lesson.

What is a bank account?

A bank account (in documents it is called an account, Uzbek «hisobvaraq») is your personal «shelf» at the bank. It records how much money has come in, how much has gone out and how much is left now. Every shelf has its own number, and through this number the bank knows without confusion whose money it is.

The most important idea: the money in an account is not paper money lying in a separate little box with your name on it in the bank's safe. It is a record at the bank: «the bank owes this customer this much money». That is why transferring money really means changing a record.

Let us get rid of one confusion in advance. The word «hisobvaraq» (account) is used in two places:

The first is in the bank's books, the second in the company's books. Both track the same money from two sides and must agree with each other in the end.

How does money move within one bank?

Zarina sends the bank a payment order. It is an instruction given to the bank: «Transfer this amount from my account to such-and-such account». It states who is paying, to whom, through which accounts, how much and what the payment is for.

Suppose both companies are served by the same bank, «Birinchi bank» (First Bank). Then the bank's job is very simple:

1. It checks the payment order: is the signature correct, is there enough money in the account.
2. It deducts 12 000 000 soum from the «Shirin tong» account.
3. It adds exactly the same amount to the «Lolazor un» account.

Not a single soum left the bank. The record on one shelf decreased and the record on another increased, nothing more.

What if there are two different banks?

Now suppose «Lolazor un» is served by another bank, «Ikkinchi bank» (Second Bank). «Birinchi bank» cannot make a record in the account of a customer at «Ikkinchi bank» by itself: that is another bank's books.

That is why banks themselves also hold accounts somewhere. As the Bank of England explains, because customers open accounts at different banks, a transfer between them creates an obligation between the banks. This obligation is settled through a common organisation with which both banks hold accounts, that is, a settlement agent. In the United Kingdom, for most sterling payment systems this role is performed by the central bank itself, the Bank of England. In the example below we also take the central bank as such a common bank. A bank's account of this kind at another bank is also called a correspondent account.

The chain of money consists of four links. Hypothetical balances (in soum):

Note: at every step there is a decrease in one place and an increase of exactly the same amount in another. The money in the two companies' accounts is the same both before the transfer (40 + 5 = 45 mln) and after it (28 + 17 = 45 mln). The money neither disappeared nor multiplied, only its owner changed.

If during the day the customers of two banks transfer money to each other many times, the banks may offset the amounts against each other instead of sending each one separately and transfer only the difference. This is called clearing, and the glossary has a separate example for this term.

Where does the accountant record this?

A company tracks its money at the bank on account 5110 "Settlement account". In accounting every account has two sides: debit and credit. Under paragraph 225 of NAS No. 21, the debit of 5110 records money coming into the account, and the credit records money going out of it.

Our transfer looks like this in the two companies' books:

One payment, two sets of books, 12 000 000 soum in both. For one it is an outflow, for the other an inflow.

If a company has several bank accounts, under NAS No. 21 (second paragraph after paragraph 225) analytical accounting is kept separately for each account opened with a bank. Then it is always clear how much money there is at which bank.

Practical tip. Fill in the «purpose of payment» line of the payment order precisely: it should show which contract or which invoice the payment is for. When the «Lolazor un» accountant receives the money, it is exactly from this line that she learns which debt has been closed. A payment with an unclear purpose turns into an unnecessary headache for both companies when reconciling debts.

In the next lesson

In the third lesson we will get to know the key terms of banking: deposit, credit, interest, collateral and bank statement.