Florida Teacher Certification Examinations (FTCE) Social Science Practice Test

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What is a demand deposit at a commercial bank?

  1. An asset to a bank and a liability to the Fed

  2. A liability to the depositor and an asset to the bank

  3. A liability to both the depositor and the bank

  4. An asset to the depositor and a liability to the bank

The correct answer is: An asset to the depositor and a liability to the bank

A demand deposit at a commercial bank refers to deposits that can be withdrawn by the account holder at any time without any notice, typically through checks or debit cards. This type of account is considered an asset for the depositor because it represents their ownership of a claim on the bank's reserves. The balance in a demand deposit account can be used at the depositor's discretion for transactions such as purchases or bill payments. On the other hand, for the bank, these deposits are classified as liabilities, as they represent obligations to the depositor. The bank owes the amount of the demand deposit to the account holder, which needs to be readily accessible. This dynamic establishes that while the demand deposit serves as an asset to the depositor (who can access and use those funds), it also signifies a liability for the bank (which must honor the depositor's right to withdrawal whenever requested). Thus, the correct understanding of a demand deposit captures this dual nature of being an asset for the depositor and a liability for the bank.

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