Cheques have been a widely used payment method for decades, allowing individuals and businesses to transfer funds securely without the need to carry large amounts of cash. This comprehensive guide covers the meaning of a cheque, its key features, and types, and the pros and cons of using this traditional financial instrument.
Table of Contents
What is a Cheque?
A cheque is a written order instructing a bank to pay a specified sum of money from the drawer’s account to the payee named on the cheque. It is a negotiable instrument under the Negotiable Instruments Act, of 1881, meaning it can be transferred to others.
The person writing the cheque, known as the drawer, must have sufficient funds in their account to cover the amount stated on the cheque. The bank, referred to as the drawee, is responsible for honouring the cheque and transferring the funds to the payee’s account.
A cheque can be issued against either a savings account or a current account.
Main Features of a Cheque
A cheque has several distinct features that set it apart from other payment instruments. Some of the key characteristics include:
1. Unconditional order
A cheque is an unconditional order, meaning the bank must honour it when presented for payment, provided the account has sufficient funds.
2. Payable on demand
Cheques are payable immediately when presented to the bank. The payee can withdraw the money at any time.
3. Drawn on a specific bank
Every cheque is drawn on a particular bank where the drawer maintains an account.
4. Requires a signature
The drawer must sign the cheque for it to be valid. The signature serves as authentication and authorisation for the payment.
5. Contains a precise amount
The cheque must clearly state the exact amount to be paid, both in words and figures, to avoid ambiguity.
Key Elements of Cheque
The key elements of a cheque are:
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Drawer: The person who writes the cheque and signs it.
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Drawee: The bank that the cheque is drawn on and will make the payment.
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Payee: The person or entity to whom the cheque is written and will receive the funds.
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Amount: The sum of money to be paid, written in both words and figures.
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Date: The date on which the cheque is issued.
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Signature: The drawer’s signature, which authorises the payment.
These elements are critical in processing the cheque. Any discrepancies or missing information can lead to the cheque being rejected by the bank.
Here is an image illustrating the various parts of a cheque:
Different Types of Cheques
There are various types of cheques, each serving a specific purpose:
1. Open Cheque
An open cheque, also known as an uncrossed cheque, can be cashed over the counter at the bank by the payee. It does not have any crossing lines on its face.
2. Depositing Cheque
A depositing cheque is used to deposit money into a bank account. It can be filled out by the account holder and presented at the bank along with a deposit slip.
3. Bearer Cheque
A bearer cheque is payable to the person who presents it at the bank, as the word “bearer” is printed on the cheque. It does not require the payee’s endorsement and can be transferred to a third party.
4. Self-Cheque
A self-cheque is written by the account holder to themselves. It is used to withdraw money from one’s own account or transfer funds between accounts held by the same individual.
5. Post-Dated Cheque
A post-dated cheque bears a future date and cannot be honoured by the bank until that date arrives. It is commonly used for scheduled payments or to provide a form of credit.
6. Traveller’s Cheque
Traveller’s cheques are pre-printed, fixed-amount cheques issued by banks or financial institutions. They are used by travellers as a secure alternative to carrying cash and can be easily replaced if lost or stolen.
7. Banker’s Cheque
A banker’s cheque, also known as a cashier’s cheque, is issued by a bank and guaranteed by the bank’s funds. It is considered a secure form of payment and is often used for large transactions.
8. Crossed Cheque
A crossed cheque has two parallel lines drawn across its face, indicating that it can only be deposited into a bank account and cannot be cashed over the counter.
9. Order Cheque
An order cheque is payable only to the person or entity named as the payee. It requires the payee’s endorsement before it can be cashed or deposited.
10. Stale Cheque
A stale cheque is one that has not been presented for payment within three months from the date of issue. Banks may refuse to honour stale cheques.
11. Blank Cheque
A blank cheque is signed by the account holder but does not contain any other details such as the payee’s name, date, or amount. It is risky to issue blank cheques as they can be misused.
12. Dishonour of Cheque
A cheque is dishonoured when the bank refuses to pay the specified amount due to reasons such as insufficient funds, signature mismatch, or stale date.
13. Ante-Dated Cheque
An ante-dated cheque bears a date earlier than the actual date of issue. It is generally not accepted by banks and may be considered invalid.
14. Mutilated Cheque
A mutilated cheque is one that has been damaged, torn, or altered in any way. Banks may refuse to honour mutilated cheques to prevent fraud.
How Long is a Cheque Valid?
In most cases, a cheque is valid for three months from the date of issue. After this period, the cheque becomes stale, and banks may refuse to honour it. However, it is essential to check with your specific bank as some may have different policies regarding cheque validity.
What is a Cheque Number, and Where Do You Find It?
A cheque number is a unique serial number printed on the cheque for identification and tracking purposes. It is usually located in the top right corner of the cheque, next to the date field. The cheque number helps in maintaining a record of all cheques issued from a particular account.
What is a Cheque Leaf?
A cheque leaf refers to an individual cheque that is part of a chequebook. Each cheque leaf contains the essential elements required for a valid cheque, such as the drawer’s information, payee line, amount fields, and signature line.
Format of Cheque Leaf
The format of a cheque leaf includes the following key elements:
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Cheque number: The unique serial number printed on the cheque for identification and tracking.
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MICR code: The Magnetic Ink Character Recognition code at the bottom of the cheque, which facilitates automated processing.
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Account number: The drawer’s account number is printed on the cheque leaf.
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Bank details: The name and branch of the drawee bank are mentioned on the cheque.
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Payee line: The line where the name of the person or organisation to whom the cheque is payable is written.
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Amount box: The box where the numerical value of the cheque amount is filled in.
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Amount in words: The line where the cheque amount is written in words to avoid ambiguity.
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Date line: The line where the date on which the cheque becomes valid is written.
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Signature line: The space provided for the drawer’s signature, which authorises the payment.
Understanding the format of a cheque leaf is crucial for correctly filling out and processing cheques.
Advantages and Disadvantages of Using Cheques
While cheques have been a reliable payment method for years, it is essential to consider both the advantages and disadvantages of using them.
Advantages of Cheques
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Safe and secure: Cheques offer a secure way to transfer money without carrying cash.
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Proof of payment: Cheques serve as documentary evidence of payment, making it easier to keep track of transactions.
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Convenient: Cheques can be easily mailed or handed over to the payee, making it a convenient mode of payment.
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Can be cancelled: If a cheque is lost or stolen, the drawer can request the bank to stop payment, minimising the risk of fraud.
Disadvantages of Cheques
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Time-consuming: Cheques need to go through a clearing process, which can take several days, delaying the availability of funds.
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Risk of bouncing: If the drawer’s account has insufficient funds, the cheque may bounce, attracting penalties and damaging the drawer’s creditworthiness.
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Possibility of fraud: Cheques can be forged or altered, leading to financial losses for the parties involved.
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Declining usage: With the rise of digital payment methods, the usage of cheques is declining, and many businesses may not accept them.
Weighing the advantages and disadvantages of cheques can help you determine whether they are the most suitable payment method for your specific needs.
How to Write a Cheque?
Writing a cheque correctly is essential to ensure smooth processing and avoid any potential issues. Follow these step-by-step instructions on how to write a cheque:
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Write the date in the top right corner.
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Write the payee’s name after “Pay.”
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Write the amount in figures in the box provided.
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Write the amount in words on the line below the payee’s name.
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Sign the cheque in the bottom right corner.
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Fill in the cheque book stub with relevant details for record-keeping.
Key Things to Remember Before Writing a Cheque
To avoid any potential problems when writing a cheque, keep these key things in mind:
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Ensure sufficient funds: Always check your account balance before writing a cheque to avoid bouncing and associated fees.
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Use permanent ink: Write the cheque using a pen with permanent ink to prevent any alterations or fading.
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Avoid leaving blank spaces: Fill in all the required fields and draw a line after the amount in words to prevent any unauthorised additions.
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Keep the cheque safe: Store your chequebook in a secure place to prevent theft or misuse.
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Maintain a consistent signature: Ensure that your signature on the cheque matches the one on file with your bank to avoid any issues during processing.
By keeping these key things in mind, you can minimise the risk of errors or fraud when writing cheques.
What is a Cancelled Cheque?
A cancelled cheque is a cheque that has been marked as “cancelled” by the account holder or the bank. This is done to prevent the cheque from being used for payment or to provide proof of account ownership without revealing sensitive information.
Cancelled cheques are often required when setting up direct deposits, automatic bill payments, or when providing account verification to a third party. By cancelling the cheque, you can safely share your account details without the risk of the cheque being used for unauthorised transactions.
Frequently Asked Questions (FAQs)
1. What happens if a cheque is misplaced during the clearing process?
If a cheque is misplaced during the clearing process, the bank will initiate a trace request to locate the cheque. If the cheque cannot be found, the drawer may need to issue a new cheque or provide an indemnity bond to the payee.
2. Who Can Cross a Cheque?
A cheque can be crossed by the drawer at the time of writing the cheque or by the payee before depositing it. Banks can also cross cheques to ensure they are only deposited into an account and not cashed over the counter.
3. What is a cheque bounce?
A cheque bounce occurs when the bank refuses to honour a cheque due to insufficient funds in the drawer’s account, signature mismatch, or other technical reasons. This results in the cheque being returned unpaid to the payee.
4. What happens when a check bounces?
When a cheque bounces, the payee is informed about the non-payment, and the drawer may face penalties and fees from their bank. The payee may also charge a returned cheque fee and may take legal action against the drawer for the unpaid amount.
