What is a Bank Draft?
A bank draft, or banker’s cheque, is a payment method where a person who owes money buys a draft from a bank for cash, which the bank then issues to the creditor. This type of cheque is drawn by a bank on itself or its agent, ensuring that it will be honoured when presented for payment. Since the draft is guaranteed by the bank, creditors typically have no concerns about receiving payment.
Examples of Bank Draft Usage
- Real Estate Transactions: When purchasing real estate, the buyer might use a bank draft to pay the deposit or final purchase amount. This assures the seller that the cheque will not bounce, facilitating trust between both parties.
- Large Purchases: For high-value items such as cars, sellers often request payment through a bank draft as it confirms the availability of funds.
- International Transactions: Bank drafts are frequently used in international trade because they provide a higher level of security compared to regular cheques.
Frequently Asked Questions (FAQs)
What is the difference between a bank draft and a personal cheque?
A personal cheque is written by an account holder and may not always be covered by sufficient funds, potentially leading to it being dishonoured. A bank draft, on the other hand, is issued by a bank and guaranteed by its funds, assuring the payee of its validity.
Can anyone obtain a bank draft?
Yes, any individual or business can obtain a bank draft by approaching a bank, providing the needed cash or having the amount deducted from their account, and paying any associated fees.
Are bank drafts safe?
Bank drafts are considered very safe as they are guaranteed by the issuing bank, minimizing the risk of non-payment.
What happens if a bank draft is lost?
If a bank draft is lost, the purchaser should immediately inform the issuing bank. Procedures involve issuing a stop payment and potentially replacing the draft after verifying the loss.
Can a bank draft be cancelled?
Cancelling a bank draft can be challenging, often requiring the consent of the payee or legal proceedings, as it essentially involves recovering the bank’s own funds.
- Certified Cheque: A cheque guaranteed by the bank, drawn against the issuer’s account, certifying sufficient funds.
- Cashier’s Cheque: Similar to a bank draft, it is a cheque drawn from the bank’s own funds and signed by a cashier.
- Money Order: A certified payment order for a pre-specified amount, often used when the parties are not well-acquainted.
Online References
Suggested Books for Further Studies
- “Accounting All-in-One for Dummies” by Kenneth Boyd
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel
- “Intermediate Accounting” by Donald E. Kieso and Jerry J. Weygandt
Accounting Basics: “Bank Draft” Fundamentals Quiz
### What guarantees the validity of a bank draft?
- [ ] The payer’s account balance
- [x] The issuing bank
- [ ] The payee’s endorsement
- [ ] A notary public’s attestation
> **Explanation:** The issuing bank guarantees the validity of a bank draft, making it a secure and trustworthy form of payment.
### Which of the following is another term used for a bank draft?
- [ ] Certified cheque
- [ ] Personal cheque
- [x] Banker's cheque
- [ ] Postal order
> **Explanation:** A banker's cheque is another term used for a bank draft.
### Why might a creditor prefer a bank draft over an ordinary cheque?
- [x] To ensure the cheque will not be dishonoured
- [ ] For lower fees
- [ ] Faster processing time
- [ ] To avoid paying taxes
> **Explanation:** A creditor might prefer a bank draft over an ordinary cheque to ensure that the payment will not be dishonoured since it is guaranteed by the bank.
### Who issues a bank draft?
- [ ] The payer
- [ ] The payee
- [x] The bank
- [ ] A financial advisor
> **Explanation:** A bank draft is issued by the bank upon the request and payment by the individual or entity.
### Can a bank draft be cancelled by the payer?
- [ ] Yes, easily through an online request
- [ ] Only if the payee agrees
- [x] Usually not, unless through legal proceedings
- [ ] Anytime before it is cashed
> **Explanation:** Cancelling a bank draft usually requires legal proceedings and may require the consent of the payee because the funds are guaranteed by the issuing bank.
### Which of the following transactions might commonly use a bank draft?
- [ ] Daily grocery shopping
- [ ] Paying utility bills
- [x] Purchasing real estate
- [ ] Buying movie tickets
> **Explanation:** Bank drafts are commonly used for significant transactions, such as purchasing real estate, where the assurance of payment is crucial.
### If a bank draft is lost, what should the purchaser do immediately?
- [x] Inform the issuing bank
- [ ] Contact the payee
- [ ] Report it to the police only
- [ ] Ignore and wait to see if it turns up
> **Explanation:** The purchaser should immediately inform the issuing bank to initiate stop payment procedures and possibly issue a replacement.
### Are there any fees associated with obtaining a bank draft?
- [ ] No, it is free of charge
- [x] Yes, there is usually a fee charged by the bank
- [ ] Only if requested by mail
- [ ] It depends on the amount of the draft
> **Explanation:** Banks typically charge a fee for issuing a bank draft as a service.
### In what situation is a bank draft particularly useful in international trade?
- [ ] When trust between buyer and seller is high
- [x] When assurance of payment is crucial
- [ ] When transactions are below $100
- [ ] When buying non-perishable goods
> **Explanation:** In international trade, where the assurance of payment is crucial and trust may not be established, a bank draft is particularly useful.
### Which of the following is a related term to a bank draft?
- [ ] Lease agreement
- [ ] Credit rating
- [x] Cashier's cheque
- [ ] Investment portfolio
> **Explanation:** A cashier's cheque is a related term to a bank draft; both are guaranteed payment instruments issued by banks.
