When a bank accepts a deposit from one of its customers, to the bank the deposit account is classified as
a. an asset.
b. a liability.
c. neither an asset nor a liability.
d. an asset in some cases and a liability in other cases, depending on the type of loan.
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The only possible answer to this question is B. Money that is deposited in a bank is always a liability from the point of view of the bank. To understand this, think about what the bank must be prepared to do when money is deposited. Once money is deposited, the bank must be prepared to give the money back. The bank is required to give the money back to the depositor whenever the depositor wants it back. Because of this, the deposits in a bank are liabilities from the perspective of the bank.
A. An Asset--when customers deposit money, the bank is able to bundle cash from many depositors to use as operating income for loan customers and administrative costs. This is why they pay savings account customers interest as an incentive for restricting their frequency of withdrawals.
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