Definition of Cheque
A cheque is a preprinted form that instructs an account provider (typically a bank or building society) to pay a specified amount to a particular recipient. This form of payment is widely recognized for managing various types of debts. Traditional cheque features that make it distinguishable from other financial instruments include fields for the date, payee, amount, and the drawer’s signature.
Types of Cheques
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Crossed Cheque: Features two parallel lines across the face, indicating it must be deposited into a bank account rather than cashed over the counter. There are further classifications such as general crossing and special crossing.
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Open Cheque: Also known as an uncrossed cheque, it can be cashed at the issuing bank itself.
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Order Cheque: Addressed to a specific payee who can either deposit it or endorse it to a third party.
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Blank Cheque: The amount is not specified; the payee completes this based on the owed debt. The drawer can set a maximum limit by writing ‘under £…’ on the cheque.
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Rubber Cheque: A cheque that ‘bounces’ due to insufficient funds in the drawer’s account.
Examples
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Payment of Services: A business writes a cheque to pay for contracted services, providing an official and documented form of payment.
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Personal Transactions: Individuals use cheques to give monetary gifts or pay personal debts conveniently.
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Business Transactions: A company issues a cheque for routine expenses like utility bills or supplier payments.
Frequently Asked Questions (FAQs) About Cheques
Q: What is the difference between a crossed cheque and an open cheque?
A: A crossed cheque must be deposited into a bank account, whereas an open cheque can be cashed directly at the bank of origin.
Q: Can a blank cheque be limited to a certain amount?
A: Yes, the drawer can indicate a maximum limit by writing ‘under £…’ on the cheque.
Q: Why do cheques bounce?
A: Cheques typically bounce due to insufficient funds in the drawer’s account, leading the bank to return the cheque without payment.
Q: What is the significance of the words ‘account payee only’ on a cheque?
A: This phrase makes the cheque non-transferable, ensuring that only the named payee can deposit or cash it, thereby reducing the risk of fraudulent conversions.
Q: Are cheques widely accepted as a mode of payment today?
A: While still widely used in the USA, the use of cheques has significantly declined in the UK and Europe due to the rise of electronic payments.
Related Terms
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Current Account: A type of bank account from which a cheque is drawn, typically offering no interest but providing high liquidity for day-to-day transactions.
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Bank Draft: A type of cheque drawn by one bank on another bank; differs from a personal cheque as it guarantees the availability of funds.
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Stale Cheque: A cheque that is presented for payment 6 months or more after its date of issue, which may be refused by the bank.
Online References
Suggested Books for Further Studies
- “The Complete Book of Banking” by Shawna O’Reilly
- “Fundamentals of Financial Instruments” by Sunil K. Parameswaran
- “Principles of Banking and Finance” by Barbara Casu, Claudia Girardone, and Philip Molyneux
Accounting Basics: “Cheque” Fundamentals Quiz
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