BAGUIO COLLEGE OF

TECHNOLOGY Baguio City, Philippines

SUBJECT TITLE : Financial Management Accounting

MODULE TITLE : Cheques (Part 2)
MODULE NO : 11
NOMINAL DURATION : 3 Hours
LEARNING OBJECTIVES:
1. To know the circumstances under which a customer’s cheque can be dishonored.
2. To know the statements of reasons for dishonor.
MODULE CONTENT:

Dishonor of Cheques
Circumstances under which a Customer’s Cheque can be Dishonored
Statements of Reasons for Dishonor

DISCUSSION

Dishonor of Cheques

➢ A cheque is said to be dishonored when it is not paid by the paying banker on presentation.

Circumstances under which a Customer’s Cheque can be Dishonored

1. When the cheque is a conditional one, the paying banker can dishonor that cheque.

2. When the customer countermands the payment of any cheque, the banker must refuse to make
the payment for that cheque.

3. When the banker receives a notice from the holder about the loss of the cheque, he cannot ignore
that notice and make the payment.

4. On receipt of a notice of the drawer’s death, the banker must stop the payment of cheques issued
by the drawer. This is because the order of the drawer to the banker to pay any cheque ceases to
operate after his death.

5. When the banker receives a notice of the drawer’s insolvency, he must dishonor the cheque
issued by the customer. This is because after a customer is declared insolvent, his properties,
including his bank balance, vest in the official assignee or official receiver, as the case may be.

6. When a garnishee order is served on the banker by a court attaching the customer’s funds, the
banker is bound to comply with the garnishee order.

7. If the bank account is a trust account and if the banker comes to know that the customer, who is
operating the trust account, intends to use the funds in the trust account in breach of trust for
his personal use, the banker must stop payment for the cheques issued by the said customer or
trustee.

8. If a cheque is presented for payment after the customer’s account is closed, the banker must
refuse payment for a cheque.

9. When a cheque is not signed by the drawer, the banker must not make the payment for such a
cheque.

10. When a crossed cheque is presented at the counter for payment, the banker must not make the
payment for that cheque.

11. If the drawer is a foreigner, and if there is an outbreak of war with the drawer’s country, the
 banker must refuse payment for the cheques issued by that customer during the time of war.

12. When the funds to the credit of a drawer are insufficient to meet the cheque issued by him, the
banker my refuse payment.

13. When the drawer’s signature on the cheque differs from his specimen signature, the banker may
refuse payment for the same.

14. When a cheque is undated, the banker may refuse payment.

15. Where a cheque bears an incomplete date, the banker may refuse payment. 16.

Where a cheque bears an incomplete date, payment may be refused by the banker. 17.

If a cheque has become stale, payment may be refused.

18. If a cheque is presented for payment outside banking hours, payment may be refused.

19. When the endorsement of the payee or the endorsee on a cheque is irregular, the banker may
refuse payment.

20. If the amount of the cheque stated in words differs from the amount stated in figures, the banker
may refuse payment.

21. If the amount of a cheque is stated only in figures, payment may be refused.

22. If a cheque is not drawn in proper form, the banker may refuse payment.

23. If the cheque is ambiguous (not clearly written), payment may be refused.

24. If a cheque bears any material alteration, the banker may refuse the payment.
Statement of Reasons for Dishonor

➢ NS (not sufficient) – it means that the funds to the credit of the drawer are not sufficient to meet
the cheque.
➢ NF (no funds) – it means that there are no funds in the drawer’s account to pay the cheque. ➢
NAF (not arranged for) – it means that the cheque has been drawn against an overdraft which has
not been arranged.
➢ EA (exceeds arrangement) – it means that the payment of the cheque would result in the
overdraft exceeding the limit sanctioned.
➢ DR (discharged required) – it means that endorsement is required.

➢ DD (drawer deceased)

➢ Drawer Insolvent

➢ Drawer Insane

➢ Do Account

➢ Account Closed

Statement of Reason for Dishonor

➢ Cheque irregularly drawn

➢ Check is post-dated

➢ Check is stale or out of date

 ➢ Cheque is mutilated

➢ Payment stopped under court order

➢ Drawer’s signature differs

➢ Alteration requires drawer’s signature

Collecting Banker

➢ The collecting banker is the banker who collects cheques drawn upon other banker’s for and on
behalf of his customers. He is called the collecting banker, as he undertakes the work of
collection of cheques.

REFERENCES:

1. Accounting Principles: A Business Perspective, Financial Accounting by Hermanson, Edwards,

and Maher
2. https://www.slideshare.net/pankit14/cheque-34137583
3. https://www.slideshare.net/RupakDey1/bptseminar-cheques

Prepared by:
Engr. Lorena G. Dayrit
Instructor

BCT LEARNING MODULES S.Y. 2020-2021 3