What are Cheques?

These days, there are millions of transactions happening every day between two
persons or parties whether it is business transactions or personal or repaying
debt, cheques play a vital role when it comes to monetary transactions. Cheques
not only facilitate monetary transactions between two parties/ persons but also it
ensures the safety, security and minimizes the risk of default during business
deals.
Learning outcomes:
• What are Cheques?
• Elements of cheque
• Types of Cheques
• Features of Cheques

What are Cheques? Definition:

A cheque is a document that grants the holder of the cheque the right to receive a
specific amount on a given date or within a set time period. It is classified as a
negotiable instrument, similar to a bill of exchange and a promissory note.

The cheques are issued by the commercial banks to their account holders whether
they are individuals or business entities. An individual or firms can issue a cheque
to any party or firm for the purpose of payment on a future specific date and the
bearer has to present such cheque in the respective bank to be paid off a mentioned
amount. Further, the bank is liable to pay the specified amount to the bearer as
directed by the account holder of the presented cheque.

Important Elements of cheques:

1. Date of payment
2. Beneficiary/ Payee Name
3. Amount
4. Signature
5. MICR Code(Magnetic ink character recognition)
MICR Code(Magnetic ink character recognition)
Magnetic ink character recognition (MICR) is a technology used primarily to
identify and process checks. The MICR on a check is the string of characters that
appears at the bottom left of the check. It consists of three groups of numbers,
including the bank routing number, the customer's account number, and the
check number.

KEY TAKEAWAYS

• Magnetic ink character recognition is the string of characters at the

bottom left of a personal check that includes the account, routing, and
check numbers.
• MICR numbers are designed to be readable by both individuals and
sorting equipment.
• They can't be faked or copied, due to the use of magnetic ink and
unique fonts.
• The benefits of the technology include enhanced security against fraud
and mechanization of check processing.
• MICR was developed in the late 1950s and is now in use globally.

There are three parties involved in a cheque. They are drawer, drawee
and payee. Drawer is the account holder, drawee means bank and
payee is the party who receives payment. Parties involved in a cheque
can be described as follows:

1. Drawer

Drawer is the party who draws the cheque upon a specified banker. He
is the maker of the cheque. He is the account holder who draws the
cheque for drawing money from his bank account. He is the person
who issues cheque directing the bank to pay a certain sum of money to
a certain person or to the bearer. Thus, the person who signs the
cheque is known as drawer.

2. Drawee

Drawee is the party upon whom the cheque is drawn. Drawee is the
bank. It is the party to whom the drawer gives order to pay the amount
to the person named on the cheque or his order to the bearer. When
the bank follows the order and pays the amount of the cheque then the
 cheque is said to be honored. In case of refusal of the order, the
cheque is said to be dishonored.

3. Payee

Payee is the party who presents the cheque for payment. He is the
person who receives money from bank. He is the party in favor of
whom cheque is issued. The payee is the person whose name is
mentioned on the cheque. If the cheque is made payable to self, the
drawer himself becomes the payee.

Types of Cheque:
There are many kind of cheques that are used by the issuer depending on their
needs and payment terms. Each kind of check has advantages and disadvantages
from the perspective of the drawer and the drawee. Now let's quickly go through
each kind of cheque, along with its characteristics and applications.

1) Bearer Cheques:
Bearer cheques are one that can be redeemed in cash by anybody who holds the
check or whose name appears on it. In other words, it is a negotiable financial
instrument enclosed by anybody who presents the check in the bank without
endorsement, and it does not require identification as well, because it is a high-risk
form of check.

Such cheques are typically issued by the owner to the most trustworthy and
credible person or entity. If a bearer check is lost, the issuer can cancel it from the
bank to prevent the risk of fraud.

2) Order Cheques:
When the issuer strikes off (cancels) the term bearer, such checks are turned into
order cheques. Order checks are made payable to the individual whose name
appears in the beneficiary column or to any other person endorsed by the original
beneficiary.

3) Self Cheque:
When the issuer or account holder uses his own cheque for self-payment or
withdrawal of funds from his own account, the cheque is referred to as a self
cheque. In the case of a self-check, the beneficiary column is completed with the
phrase "SELF" rather of the name of another individual.

Instead of other traditional methods such as ATM or slip withdrawal, self

cheques are usually presented by the owner for immediate and large withdrawal
cash.

4) Account Payee/ Crossed Cheques:

When a cheque is crossed twice with two parallel lines at the top corner, it is
converted into an account payee cheque. An account payee check is only payable
into the beneficiary's bank account. They are the safest types of checks and are
usually used in commercial transactions by traders to pay employee wages,
previous bills, and other expenses.

These cheques are sometimes known as crossed cheques; however, there are three
basic conditions for crossings, which are as follows.

• When two parallel lines are simply crossed at the top corner of the
check, this is known as a general crossing. Such a crossing implies
that payment should only be credited to a bank account, whether
owned by the payee or someone else endorsed by the original
beneficiary.

• A/c payee crossing happens when two parallel lines cross at the top
corner of a check and the words "Account Payee Only" are printed
between such parallel lines. This crossing ensures that funds are only
sent to the payee's bank account.

• If the drawer want to pay a certain amount in a specific bank,

he/She may simply put the bank's name between two parallel lines
on the body of the check, ensuring that the payment is made
exclusively in the bank accounts of the listed banks. A special
crossing is the term given to this kind of crossing.
5) Bankers Cheque:
Banker cheque or official check Also called cashier's check, treasurer's
check, bank check, certified check, an official check is, simply put, a check
that the bank issues with guaranteed funds. They are considered a more
secure form of payment than a personal check for a few reasons.

For the purpose of paying various overdue bills, such as rent, energy, maturity
payments, etc., the banker's check is issued either by the bank itself or on behalf of
its clients. In other words, the drawer of the banker cheque might be the bank or
any other person or entity, and the recipient could be anyone, such as a person,
corporation, or company.

The payment of such cheques is guaranteed by the bank because, unlike other types
of cheques, there is no requirement to put money into the issuer's account. The
banker cheques cannot be transferred to anybody, in other words that is not
negotiable.
6) Travellers Cheque:
A traveller's cheque is just a cheque that is used by people who are traveling
internationally and do not want to take a large quantity of cash with them to
prevent the risk of theft.

Such checks may be included or used for payment purposes by the owner in
foreign countries where foreign currencies are traded or recognized.

7) Cancelled Cheque:
When the account holder or the issuer totally crosses a common cheque, it
becomes a cancel cheque. The cancelled cheques are used to validate certain
financial details of businesses or people.

8) Post-dated Cheques:
A post-dated cheque is issued when a cheque is drawn by the drawer to pay a
certain amount to any person/firm on a future set date. A post-dated cheque
guarantees payment on a future set date only; it cannot be cashed before that
date.

Such cheques are used in businesses where goods or services are sold on credit,
for debt repayment, rent payments, and so on. A post-dated check is also used as
security when items are being delivered from one party to another. ( COD).

9) Blank Cheque:
A blank cheque can be utilized in a business transaction where a person or firm
signs an agreement with the company for dealerships/invoices or any other
services or when the quantity of cash and date of payment are unknown.

A blank check does not include the date of payment or the amount of money,
which are usually filled up by the beneficiary following a clear conversation on a
future agreed day. However, because issuing a blank cheque is dangerous, the
issuer usually sets a maximum limit on such cheque to reduce risk.
10) Gift Cheques:
These are special types of cheque which are designed for gift purposes such as prize
money or presents in tournaments or any special events. The design of such
cheques is big in size, unlike common cheques. Gift cheques are commonly
obtainable in the form of gift cards or vouchers that can be used to pay for a specific
purchase. They are also known as gift certificates, gift vouchers, or voucher
cheques.

11) Stale Cheque:

Staled cheques are checks that have exceeded their validity period, typically three
months from the date of issuance.

Each check is good for three months from the date written on it. If the payee
presents the cheque after three months, the payment will be postponed since it
has expired.

12) Mutilated Cheques:

Mutilated cheques are ones that have been destroyed or crushed, particularly the
MICR code, for whatever cause. Due to the authenticity of the check, a mutilated
check cannot be honored.

Conclusion:
The different types of cheques have their own features and they are utilised
according to the purpose of issuers as well as payees. The cheques are significant
financial instruments which ensure risk-free, convenient and flexible delivery of
payment for business entities and individuals in the modern era. Hope the above
guide will help you to understand the importance and purpose of cheques.