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Cheque: Meaning, Characteristics, types, and how do they work

[ecis2016.org] A cheque is a crucial financial document for making a payment. Here’s all you need to know about cheques.

A cheque is a document, used for making a payment to a person or an entity and issued to a bank, instructing it to pay the specified amount to the person or entity in whose name it has been made. Here’s all you need to know about cheques. 

What does the term cheque mean?

Cheques are written, dated, and signed documents that instruct a bank to pay a certain amount of money to the bearer. The entity who writes the cheque is called the drawer or payor, while the person to whom the cheque is addressed is called the payee. Drawees are the banks on which cheques are drawn.

Cheque: Characteristics

  • A cheque must be written and properly signed by the drawer.
  • An unconditional order is contained in a cheque.
  • Cheques are issued only to a specific bank.
  • The amount specified is always sure and should be clearly stated in both words and figures.
  • Cheques always have a certain payee.
  • On-demand, a cheque is always payable.
  • A cheque must be dated, or else it is invalid and will not be honoured by the bank.

Cheque: Types

Cheques can be used for many different purposes.

Certified cheque

A certified cheque verifies that the drawer’s account has enough funds to honour the cheque’s amount. This ensures the cheque will not bounce. It is necessary to present the cheque at the bank on which it is drawn for the bank to verify its authenticity.

Cashier’s cheque

The bank guarantees cashier’s cheques and signs them by a bank cashier, so the bank is responsible for them. When purchasing a car or home, this type of cheque is often required.

Payroll cheque

Payroll cheques, or paychecks, are another example of how employers compensate their employees. Direct deposit and other electronic transfer methods have replaced physical paychecks in recent years.

Bounced cheque

The cheque cannot be negotiated when the amount written is greater than the balance in the checking account. It is also called a ‘bounced cheque’. In most cases, the payor is penalised when a cheque bounces. Payees are charged fees in some cases as well.

Where can I find the cheque number?

You will need the cheque number if you wish to track its status. The cheque number is the first six numbers on the bottom of the cheque.

How do cheques work?

Cheques are bills of exchange that guarantee a certain amount of money. The drawing bank gives it to the payor, who uses it to pay the account holder. Payors write cheques and present them to payees, who then take them to their bank or a financial institution to negotiate for cash or to deposit them into an account.

Cheques allow two or more parties to conduct a monetary transaction without exchanging physical currency. Rather, the cheque amount is a substitute for the physical currency of the same amount.

You can cash or deposit cheques. The funds are drawn from the payor’s bank account when the payee presents a cheque to a bank or other financial institution for negotiation. Cheques are typically written against a checking account, but they can also be used to negotiate funds from a savings account or other type of account.

Cheques can be used to pay bills, make gifts, or transfer money between two people or entities. A third party cannot cash a lost or stolen cheque, as only the payee can negotiate the cheque. Debit cards, credit cards, wire transfers, and internet banking are all modern alternatives to cheques.

Who are the parties to a cheque?

There are usually two parties to a cheque. One is the drawer, and the other is the payee. Drawees are the bankers on whom cheques are drawn, and drawers are the people who draw the cheques.

In addition to these, there may be a payee liable to pay the amount shown on the cheque. Additionally, there can be a holder who is generally the original payee. A cheque holder becomes the endorsee when he endorses the cheque to someone. An endorsee, on the other hand, is a party whose cheque is endorsed.

What is the positive pay system?

A positive pay system involves reconfirming key details of the cheque with the bank, which is then cross-checked with the checked cheque at the time of payment.

  • To increase customer safety and reduce cheque fraud, a positive pay system has been introduced.
  • Moreover, the process involves reconfirming the details of large value cheques, such as those exceeding Rs 50,000. Checks are honoured if the details match; a discrepancy is flagged if there is any inconsistency.

What does MICR mean?

Checks are generally printed with a nine-digit code called MICR, which stands for Magnetic Ink Character Recognition. The first three digits stand for the city code, the next three the bank code, and the last three stand for the bank branch code. Checks with MICR codes are easier to identify, eliminate payment errors, and enable payments to be processed faster.

Cheque: Benefits

  • You do not have to carry cash
  • You can stop payments if necessary.
  • Cheques are safer if they are crossed.
  • Notes do not have to be counted; hence counting mistakes are not possible.

Cheque: Drawbacks

  • Other creditors may not accept cheques as they are not legally tenderable.
  • Without funds in the drawer’s account, they are worthless.
  • Checks are time-consuming to deposit into an account.
  • Small amounts should not be paid with cheques.
  • Crossed cheques will cause problems for those without bank accounts.

Points to keep in mind when writing a bank cheque

  • In the top left corner of the cheque, delete the words ‘OR BEARER’ and add the words ‘A/C Payee’. By doing so, you ensure that no one else can get the stated amount except the person in whose favour the cheque is drawn.
  • Do not leave spaces between the words PAY and the receiver’s name or between the recipient’s name and surname. It is important to follow this practice since it prevents anyone from filling in the alphabet before or after the name to claim the money.
  • You should always use the symbol ‘/-‘ at the end of the ‘RUPEES’ column after mentioning the amount in words.
  • Please make sure that there is no sort of overwriting. The banks would not accept any scribbles or cancellations of texts.
  • Please enter the correct date. Anyone can use a cheque without a date to withdraw cash and put any date on it. In addition, a cheque with a post- or pre-date is another issue that can lead to the cheque not being honoured. Furthermore, incorrectly written data, such as the wrong month or year, could cause problems.
  • If needed, sign twice to ensure the cheque does not bounce due to a mismatched signature.
  • On the reverse side of your cheque, indicate that you are paying utility bills with your credit card, mobile number, connection number, etc.
  • MICR Bands may not be stapled, disfigured, folded or damaged in any way.

The guidelines for the proper filling of cheques have been issued by certain banks in India. For proper understanding, you should read your bank’s guidelines.

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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