What it means
In banking, a company's account generates charges for services such as payments, deposits, cash handling and wire transfers. The bank records each service, prices it and totals the fees for the month.
The bank also gives credit for the balances the customer keeps on deposit, because the bank can lend that money out. This credit is called an earnings credit and is usually expressed as an earnings credit rate applied to the average balance that is free to use after any reserve requirements.
If the credit covers the fees, the customer pays nothing for the month. If the fees are larger, the customer pays the difference, and a surplus credit may be lost or carried forward under the account terms.
Treasurers review the analysis to decide whether it is cheaper to pay fees directly or to hold more cash on deposit. A company with a large idle balance may do better to move that cash into an interest-bearing investment and pay the fees outright.
In the accounting sense, account analysis means looking behind a balance on the general ledger to see what makes it up. An accountant lists the individual items, agrees them to supporting documents and investigates anything unusual.
This kind of review is a core part of month-end close and audit preparation. Analysing accounts such as accruals, prepayments and suspense accounts ensures that old, wrong or unsupported items are found and corrected before they distort the financial statements.
In practice
Real-world examples
Example 1
A wholesale distributor receives its monthly bank analysis statement showing $420 of service charges and an earnings credit of $310. The treasurer pays the difference of $110. She asks whether moving some payments to a cheaper method could reduce the charges next year. The bank offers a lower price for electronic payments than for cheques.
Example 2
A manufacturer's accountant reviews the prepayments account at the end of the quarter. She lists each item, such as insurance and software licences, and finds a $12,000 policy that expired two months ago but has not been written off. She posts an adjustment to correct the balance.
Example 3
A software firm preparing for an audit analyses its accrued liabilities account of $85,000. The finance team matches each accrual to invoices or contracts and discovers a $9,000 item that no longer applies. They release it, which improves the accuracy of the balance sheet. The auditor later tests a sample of the other items and finds no further issues.
Think of it
Account analysis is examining individual accounts to understand what's in them and whether it's correct.
Formula
Calculation
Earnings credit = Average collected balance x Earnings credit rate x (Days in month / 365)
Net fee payable = Service charges - Earnings credit (if positive)
Suppose a company keeps an average collected balance of $200,000, the earnings credit rate is 1.20% and the month has 30 days. Earnings credit = 200,000 x 0.012 x 30 / 365 = about $197.26. Service charges for the month are $350. Net fee payable = 350 - 197.26 = $152.74.Case study
Seen in the real world
Summit Trading is an illustrative, fictional importer that kept an average collected balance of $600,000 in a business account that paid no interest. Its bank analysis showed monthly service charges of $900 and, at a 1.20% earnings credit rate, a credit of 600,000 x 0.012 x 30 / 365 = about $592 for a 30-day month, leaving a net fee of about $308.
The finance manager realised that the large balance earned nothing beyond that credit. She moved $400,000 into a short-term deposit paying 3.5%, which produced interest of 400,000 x 0.035 = $14,000 a year, and left $200,000 in the account.
With less on deposit, the credit fell to about $197 and the net monthly fee rose to about $703, an extra cost of roughly $395 a month, or $4,740 a year. The net benefit was therefore 14,000 - 4,740 = $9,260 a year, and the illustrative lesson is that reading the analysis statement prompts better decisions about where idle cash should sit.
Watch out
Common mistakes
- Ignoring the monthly bank analysis, which can hide fees that are higher than necessary.
- Keeping large idle balances only to earn a small credit, when the cash could earn more elsewhere.
- Skipping the reconciliation of accounts in the ledger, which allows errors and old items to remain unnoticed.
Questions
People also ask
What is an earnings credit rate?
It is a rate set by the bank that converts a customer's average collected balance into a credit used to offset service fees.
Who prepares an account analysis?
In banking the bank produces it, while in accounting it is prepared by a bookkeeper, accountant or auditor reviewing the ledger.
How often should accounts be analysed?
Bank statements are usually reviewed monthly, and ledger accounts should be analysed at least at each period-end, with high-risk accounts reviewed more often.
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