A cheque is a very common form of negotiable instrument. You need a savings bank account or current account in a bank, in order to issue a cheque in your own name or in favor of others, thereby directing the bank to pay the predetermined amount to the individual named in the cheque.
This transaction has to be handled very delicately as it may lead to some serious banking frauds. Read a Banking awareness book to manage your account and safeguard your transactions from frauds and scams.
A cheque is a document which ensures the payment of a particular amount of money on demand to a certain individual or to the bearer of the instrument. It is a printed form which you can use to make payment from your bank account. When you write a cheque you enter the amount of money that you want to send to the person and who is to be paid to, sign and hand it over to the individual you want to make payment to. Your bank then pays the money to that individual (payee) from your account.
It is one of the safest and convenient modes of making payments and is transferred by mere delivery.
One of the benefits of the cheque is that you can transfer a high-value transaction without any hassle which would be very difficult if hard cash was used instead.
The issuer of the cheque has an account (savings or current) with the bank to which it is connected. There are various types of cheque books which depend on the type of account you have.
Cheque refers to a negotiable instrument that contains an unconditional order to the bank to pay a certain sum mentioned in the instrument, from the drawer’s account, to the person to whom it is issued, or to the order of the specified person or the bearer.
Parties to Cheque
There are three parties to a cheque
- Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the sum.
- Drawee: The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
- Payee: The beneficiary, i.e. to whom the amount is to be paid.
Apart from these three, there are two more parties to a cheque:
Endorser: When a party transfers his right to take the payment to another party, he/she is called endorser.
Endorsee: The party in whose favour, the right is transferred, is called endorsee.
Sometimes, the drawer and payee can be the same person, when the drawer writes a self-cheque.
Some of the important details which should be present in a cheque are as follows:
- A cheque should be dated.
- A cheque should mention the amount of money in figures and words.
- A cheque must be signed by the person (Drawer) issuing the cheque
- A cheque must be drawn upon a specified bank (Drawee).
- A cheque must have the name of the recipient (Payee) of the cheque.
Some of the most common types of cheque are listed here.
- Bearer Cheque
The first among the types of cheques is the bearer cheque. This cheque is payable to the bearer of the check or whose name the cheque carries in the column meant for the name of the drawee. Ideally, this cheque has “or bearer” printed at the end of the dotted lines, which is meant to have the name of the drawee. This cheque can be presented over the counter of the drawee bank and is payable to the one presenting it. It is a transferable instrument and thus can be passed on to another by mere delivery, there is no need to endorse this type of cheque.
- Order Cheque
In this cheque, the printed word “bearer” is canceled thereby making it payable only to the person whose name is written in the place of drawee. Once “bearer” has been canceled on the cheque, it is automatically understood that this is an order cheque and the bank can only complete the transaction once they have identified, to their satisfaction, the bearer of the cheque to be the same person, as named in it.
- Crossed Cheque
In a crossed cheque, the drawer makes two parallel transverse lines at the top left corner of the cheque with or without writing “a/c payee”. This makes sure that no matter who presents the cheque to the drawer bank, the transaction is made into the account of the person named in the cheque only. The advantage of cross cheque is that it reduces the risk of money being given to an unauthorized person because this type of cheque can only be cashed by the drawee’s bank.
- Open Cheque
Also known sometimes as an uncrossed cheque. Any cheque that is not crossed comes under open cheque category. This cheque can be presented to the drawer’s bank and is payable to the person presenting it. The drawee of this cheque can also transfer it to another person by writing their name on the cheque and thereby making them the drawee. To make the cheque open, the word OPEN should not be crossed off, and the person issuing the cheque must ensure his/her signatures on both the front and the back of the cheque. Otherwise, the payee may be denied the payment by the bank. The payee is also expected to sign at the back of the cheque while receiving the amount.
- Post- Dated Cheque
A cheque bearing a later date than the one on which it is actually issued, is called as a post-dated cheque. This cheque maybe presented to the drawee bank at any time after its issuance, but the money will not be transferred from the account of the payer until the date mentioned on the cheque. The payee can also present the cheque after the date mentioned on the cheque too. It will still be valid, and the money will be transferred to the payee’s account.
- Stale Cheque
As the name suggests, a stale cheque is one which is past its validity period and can no longer be encashed. Initially, this period was six months from the date of issue. Now, this period has been reduced to three months.
- Travelers’ Cheque
These may be equated with a universally accepted currency. A travelers’ cheque is available almost everywhere and comes in various denominations. This is an instrument issued by the bank itself to make payments from one place to another. There is no expiry date of a travelers’ cheque and thus it can be used during your next travel as well, or you have the option to encash it once you land back in India.
- Self Cheque
The drawer usually issues a self-cheque to his or her self. The name column of the drawee has the word “self” written in it. A self-cheque is drawn when the drawer wishes to withdraw money from the bank in cash for his use. This cheque can only be encashed in the account holder’s or the drawer’s bank. This cheque must be used carefully because if it is lost, another person may easily get it encashed by visiting the drawer’s bank.
- Bankers Cheque
A banker’s cheque, as is self-explanatory here, is a cheque issued by the bank on behalf of the account holder in order to make payment of a specified sum, by order, to another person within the same city. It is valid only for three months from the date of issue, but if needed, can be re-validated upon fulfilling certain legal obligations.
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