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Cheque - Definition & Advantages of Cheque | What is a Cheque?

A cheque is a document given to a bank with instructions to pay the specified sum to a person or an entity. 

What exactly does "cheque" mean?

Cheques are written, dated, and signed instructions given to a bank to pay a specified sum of money to the person who is named on the cheque. The drawer or payer is the individual or entity who writes(draws) cheques. At the same time, the cheque receiver is known as the payee. The banks on which cheques are drawn are known as the drawee. 


How does the cheque function?

  1. Cheques guarantee a specified sum of money, which the payor utilises to pay the account holder after receiving it from the drawing bank. Payor issues cheques, which payees consent to and bring to their bank or another financial institution to exchange for cash or transfer directly into the bank account.

  2. Two or more parties can undertake a financial transaction using a cheque without transferring actual money. Instead, the amount on the cheque serves as a replacement for the equivalent amount in real money.

  3. Cheques can be withdrawn in cash or deposited directly in the bank account. The money is withdrawn from the payor's bank account when the payee submits a cheque to a bank or other financial institution for negotiation. Cheques can be used to request money from a savings account or different sort of account, although they are commonly written against a checking account.

  4. Cheques can be used to transfer money between two individuals or entities, pay bills and make gifts. A third party cannot withdraw cash from a misplaced or stolen cheque since only the payee has the authority to do so. Modern cheque alternatives include wire transfers, credit cards, debit cards, and internet banking.

Benefits of the Cheque

  1. There's no need to carry cash.

  2. Payments can be halted if necessary.

  3. Transferring through cheques makes them more secure.

  4. Since physical notes are not used, errors are unlikely to happen. 

Characteristics of the Cheque

  1. The drawer must adequately write a cheque and sign it.

  2. A cheque contains an unconditional order.

  3. Only one bank is authorised to receive cheques.

  4. The defined amount should always be specified and indicated in words and numbers.

  5. There is always a specific payee on cheques.

  6. Cheques are always due upon demand.

  7. A cheque must be dated for the bank to accept; otherwise, it will be invalid.

Types of cheques

  1. Bearer Cheque: A cheque payable only to the person holding or carrying it is known as a bearer cheque. These cheques are identifiable by the phrase "or bearer" printed on them. The person presenting the cheque can receive the payment without any additional authorisation from the issuer.

  2. Order Cheque: An order cheque is issued to a specific person, and the phrase "or bearer" is cancelled. The bank will verify the identity of the person presenting the cheque before releasing the payment.

  3. Crossed cheque: A crossed cheque is marked with two sloping parallel lines and the words "a/c payee" on the top left. The payment is only made to the individual whose name is written on the cheque, along with their account number. These cheques are safer as they can only be encashed at the drawee's bank.

  4. Open Cheque: An open cheque is uncrossed and can be encashed at any bank by the person presenting the cheque. It is transferable from the original payee to another payee. The issuer needs to sign both at the front and back of the cheque.

  5. Post-dated cheque: A post-dated cheque is dated for a later encashment date. The payment is processed only on the mentioned date, even if presented earlier. It is not valid before the mentioned date.

  6. Stale cheque: A stale cheque is one that has expired, i.e., three months after the date of issuance.

  7. Traveller's cheques: Traveller's cheques are issued to foreigners for use during vacations instead of carrying cash. These cheques can be encashed at banks located in other locations or countries, and they do not expire.

  8. Self-cheque: A self-cheque has the word "self" written in the drawee column and can only be drawn at the issuer's bank.

  9. Banker's cheque: Banker's cheques are issued by a bank on behalf of an account holder to make a remittance to another person in the same city. They are non-negotiable instruments and are valid for three months. They can be revalidated under specific conditions.