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Methods of transferring money: standing orders and Direct Debits

In this step we will look at standing orders and Direct Debits.
The next type of payment that we’re going to consider is standing orders. These are customer’s instructions to their bank to pay a fixed amount at regular intervals to a named party. So for example, I may instruct my bank to pay a fixed amount of, let’s say, £120 a month, which is a regular interval in order to pay my council tax bill. Another example might be a standing order to pay £600 rent on a monthly basis. Most of us will have set upon the standing orders or direct debits perhaps without even realizing, in order to pay a lot or our household bills.
For example, I’ve also got direct debits in place to pay for things such as my home telephone and mobile phone bills. Let’s also consider direct debits here then too. The definition of these does differ slightly to a standing order which we’ve just seen. Is that these are authorized by customers for recipients to claim payments from the customer’s accounts. So for example, I might authorize my car insurance company to claim a payment from my bank account every month in order to make payments to ensure my car to be on the road. The key difference with a direct debit is that these can be variable in their amounts and also how frequently the amounts are taken from the bank account.
For example, you could arrange to pay off the full balance of a credit card bill by direct debit regardless of how much the balance is each month. Whereas with a standing order, you could not do this as this amount would be fixed. Both direct debits and standing orders, though, are valid until a customer cancels or changes them and this does apply to both in the same way.

The next two methods of transferring money that we’re going to look at are standing orders (sometimes referred to as an ‘SO’) and Direct Debits (a ‘DD’). Watch the video above to hear the Kaplan tutor explain what these two methods are and how they differ from one another.

These are two methods of transferring money from a business’s account to that of another entity without having to write a cheque!

Standing orders

A standing order is an instruction to the customer’s bank to make regular payments, usually of a fixed amount.

To arrange a standing order, all the customer needs to do is sign a standing order mandate which authorises the bank to make the payments.

Standing orders are ideal for paying regular monthly bills such as insurance premiums.

But they can also be used to transfer money between a customer’s own different accounts. For example, the business might set up a standing order to each month transfer a sum of money from their current account to a deposit account, where it will earn more interest and help build the business’s reserves.

Direct Debits

Direct Debits are an instruction to the customer’s bank to allow a third party to debit (i.e. to collect money from) the customer’s account at regular intervals.

Direct Debits are a more suitable way of transferring money compared with standing orders when either:

  • the amount varies from payment to payment
  • or the date of payment is uncertain.

Direct Debits are useful, for example, for paying items such as membership subscriptions which increase from year to year or monthly bills which alter in amount each month, such as credit card bills.

Both Direct Debits and standing orders remain active until the customer cancels or changes them.

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Other Accounting Functions: Payroll and Banking

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