A cheque is a document directing a bank to pay a specified sum to a person or entity.
What is a cheque?
A cheque is a written, dated, and signed instruction to a bank to pay a certain sum of money to a person or entity. The one who writes the cheque is the payer, and the recipient is the payee. The bank on which the cheque is drawn is the drawee.
How does a cheque work?
- Cheques ensure a certain sum of money which is used by the payer to pay the account holder. Cheques are issued by the payer and accepted by the payee, who can cash it or deposit it into their bank account.
- A cheque allows for a financial transaction between two or more parties without the transfer of physical money.
- Money can be withdrawn in cash or deposited directly into the bank account via cheques. The money is withdrawn from the payer's bank account when the payee deposits the cheque into a bank.
- Cheques can be used to transfer money, pay bills, and give gifts. If lost or stolen, a third party cannot cash the cheque as only the payee has the authority to do so.
Benefits of cheques
- No need to carry cash.
- Payments can be stopped if necessary.
- Security in transferring money through cheques.
- Less chance of errors as physical notes are not used.
Characteristics of cheques
- The payer must write and sign the cheque correctly.
- A cheque gives an unconditional order.
- Only one bank is authorized to receive the cheque.
- The exact amount must be indicated in words and numbers.
- There is always a specific payee on the cheque.
- Cheques are payable on demand.
- A cheque must be dated to be valid.
Types of cheques
Bearer Cheque:Payable only to the person who holds it.
Order Cheque:Issued to a specific person, bank verifies the identity before payment.
Crossed cheque:Can only be encashed at the drawee's bank.
Open Cheque:Encashed at any bank by the bearer.
Post-dated cheque:Dated for a future encashment date.
Stale cheque:Expired, i.e., three months after the date of issuance.
Traveller's cheques:Used by foreigners instead of cash during travel.
Self-cheque:Has "self" written in the drawee column, can only be drawn at the issuer's bank.
Banker's cheque:Issued by a bank on behalf of an account holder for payment to another person.