A beginner’s guide to cheques

You may just see cheque as a sheet of paper but there is a lot that goes into to ensure that a cheque does not get dishonored. This article gives in insight into how to write a cheque and the types of cheques along with parties to a cheque

There are different methods to make a financial transaction which are successfully used by individuals, corporate organizations and firms. Out of these varied options, a cheque is a really important financial instrument.

A cheque is a financial instrument which instructs a bank to pay on the demand from a person’s account to another person’s/company’s account or pay in cash to the person whose name is mentioned on the cheque. It was introduced to increase safety and convenience in transaction. The transactions do not involve exchange of hard cash therefore loss due to theft is minimized.

Parties to a Cheque

In financial transactions that use cheques as a mode of payment usually involves three parties –

1.  Drawer (maker)

The person issues to cheque on his/ her bank account is called a drawer. In simple words, the party which writes the cheque is called drawer.

• Drawee –

It is the bank on which the cheque is drawn. In simple words a drawee refers to the bank to which the cheque is paid to

• Payee-

The individual who is being paid by the mode of cheque is called payee. In other words, the person whose name is mentioned on a cheque is called a payee.

Example

Akshay buys goods worth Rs. 10,000 from Salman.  Akshay has a bank account with Kotak Mahindra Bank and Salman has an account with Citi Bank. Akshay pays Salman for his dues using a cheque. In the above scenario Akshay is the drawer, Citi Bank is the drawee bank and Salman is the payee.

Advantages of cheque payments

• A cheque can  be issued anytime
• Convenient as there is no need to carry cash
• Issued cheques can be blocked if you wish to
• Lost cheques can be easily traced
• Customers get a statement of cheques they have issued at the end of the month

Types of Cheque

 Cheques are widely used to make payments at a later date.  In case of a cheque, there are different types of cheques which one uses in various circumstances.

1. Bearers Cheque: As the name suggests, the cheque is payable to the person whose name is mentioned on it. This cheque has ‘or bearer’ printed on the cheque. Bearer’s cheque is presented over the bank counter and the  party presented could en-cash it.

• Order Cheque: On an order cheque, ‘bearer, word is cancelled which makes is payable on the the person whose name is written on the cheque. Once the drawee cancels the word bearer written on the cheque it automatically becomes an order cheque. The transaction using an order cheque can only be completed once the person presenting is identified as the same person whose name is mentioned on the cheque.

• Crossed Cheque: In a crossed cheque the drawer (maker) draws two parallel lines on the top left corner of the cheque. Writing A/C payee is optional as the two lines drawn mean the same. This makes a cheque even more secure. No matter who presents the cheque to the bank, the money would be transferred to the account mentioned by the drawer.

• Open Cheque: A cheque which does not have two parallel lines on the top left corner is referred as an open cheque. 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 his/her name on the cheque and thereby making them the drawee. In simple words, a drawee can endorse this cheque to somebody and make them the drawee.

• Post- Dated Cheque: A cheque that is drawn for a later date. Basically the cheque could be presented a today but the money would be transferred on a given date mentioned on the cheque. The payee can deposit this cheque after the date mentioned on the cheque. it will still be valid, and the money will be transferred to the payee’s account.

• Stale Cheque: Initiallya cheque had a validity of six months starting from the date of issue, this has now been reduced to three months. A stale cheque is one which is past its validity period and can no longer be en-cashed.

• Self Cheque: The drawer issues a cheque to him/herself. The drawer writes the word ‘self’ in the name column. A self cheque is drawn when a person wishes to withdraw money from his own account. This cheque can only be en-cashed 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 en-cashed by visiting the drawer’s bank.

• Banker’s Cheque: As the word suggests, banker’s cheque is issued by a bank on behalf of the customer/account holder in order to make payment of a specified sum, by order, to another person within the same city. They have a validity of 3 months

How to write a cheque

At first glance you might find it easy to write a cheque but it requires significant considerations while drawing a cheque. It is important to know each and every step to ensure your money reaches the right person at right time

1. Strike off ‘OR BEARER’ and add ‘A/C Payee’: It is important to change ‘OR Bearer’ to A/C payee in order to make a cheque safer. Once you do this no one apart from the person whose account number is mentioned could process the amount. If you don’t strike off the words ‘OR Bearer’ any person holding the cheque could en cash it over the counter

• Don’t leave spaces: It is important to ensure that you don’t leave spaces while writing a cheque. Try to leave no space between ‘PAY’ and ‘beneficiary name’. This practice would reduce the chances of fraud as now nobody could fit alphabets or numbers between what you have written.

• Write ‘only’ after mentioning amount:  To mention the word only after the amount column is a necessary practice. Moreover you should add slash followed by a hyphen after mentioning the amount in numbers. A cheque would not be accepted by a bank if an employee feels that the amount entered was altered.

• Don’t write on MICR bank: Your transaction will clearly be canceled if by any chance you end up writing or signing right over the MICR band. Therefore you should be careful while signing and ensure that you sign in the place provided write above your name.

• Mention the correct date: Date has to be entered very carefully, make sure you don’t enter any post-pre date on a cheque. Entering a wrong date could lead to dishonor of a cheque.

• Maintain record of your cheques: Every user should cautiously maintain a booklet containing cheque records. It is advisable to record essential details from a cheque such as a cheque number, issuer name, and date should be secured for future dealings. By following this step, you can avoid any sort of doubtful activity or fraud related to cheque dealings.

• Don’t overwrite:  Over writing is one of the most common mistakes which you should avoid. A cheque directly gets dishonored if anything seems overwritten. Bank employees primarily focus on scribbling and text cancellations. You will have to write a completely new check if a banker finds something overwritten.

Nearly every bank publishes its own set of guidelines to fill a cheque. It is important for you to go through your bank’s set of guidelines for proper awareness. This would make you more alert about cheques.

Conclusion

Cheque is a really popular financial instrument when you want to pay somebody at an agreed date but not immediately. Cheques make a transaction secure and safer than cash as there is no space left for theft. Though being one of the safest financial instrument available still there are chances of fraud, therefore one should be really careful while writing a cheque. Certain small things like adding a slash after amount, leaving no spaces might not seem important but they actually add to security of a transaction.

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