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"Earnings allowance, also known as an earnings credit, is a method used by banks to compensate account holders for maintaining certain deposit accounts, such as business checking accounts."
Introduction
Earnings allowance, also known as an earnings credit, is a method used by banks to compensate account holders for maintaining certain deposit accounts, such as business checking accounts. It is an amount of money calculated based on the average daily balance of the account that can be used to offset fees or service charges associated with the account.
Earning Allowance
The earnings allowance is typically expressed as an annual percentage rate (APR) applied to the average daily balance of the account over a specific period, such as a month. The calculated amount is then credited to the account, and it can be used to offset fees for services provided by the bank, like check processing, electronic transactions, and account maintenance.
The purpose of the earnings allowance is to incentivize businesses or account holders to maintain higher balances in their checking accounts, as a higher average daily balance will result in a larger earnings credit. By doing so, businesses can reduce or eliminate certain fees associated with their banking activities, making it more cost-effective to manage their finances.
Example
Example: Company XYZ's Business Checking Account
Company XYZ maintains a business checking account with a local bank. The bank offers an earnings allowance feature, where the company can earn a certain percentage on their average daily balance to offset some service charges.
For this example, let's assume the following:
Calculation of Earnings Allowance:
Step 1: Calculate the earnings allowance for the month.
Earnings Allowance = (Earnings Allowance Rate / 365) * Average Daily Balance * Number of Days in the Month
Earnings Allowance = (2.5% / 365) * $50,000 * 30 (assuming a 30-day month)
Earnings Allowance ≈ (0.0068) * $50,000 * 30 ≈ $1,020
Step 2: Compare the earnings allowance with the monthly service charges.
Monthly Service Charges: $200
Since the earnings allowance of $1,020 is greater than the monthly service charges of $200, the bank will credit the earnings allowance to Company XYZ's business checking account to offset the fees.
Step 3: Final Account Balance Adjustment
Company XYZ's final account balance adjustment for the month would be:
Final Account Balance = Average Daily Balance - Monthly Service Charges + Earnings Allowance
Final Account Balance = $50,000 - $200 + $1,020 = $50,820
In this example, the bank credited an earnings allowance of $1,020 to Company XYZ's business checking account, which more than covers the $200 in monthly service charges. As a result, the final account balance for the month increases to $50,820.
Please note that the actual terms and conditions of earnings allowance may vary based on the bank's policy, the type of business checking account, and the account holder's specific agreement with the bank.
Conclusion
It's important to note that the earnings allowance is specific to certain types of deposit accounts, typically business checking accounts. Personal checking accounts may not offer this feature. Additionally, the earnings allowance may not cover all fees associated with the account, and there might be other service charges that the account holder would still be responsible for.
The specific terms and conditions of the earnings allowance vary from one bank to another, so it's essential for account holders to review their account agreements to understand how the earnings allowance works for their particular account.