Definition
An unpaid cheque, also known as a dishonoured cheque, is a cheque that has been presented to the payee’s bank and entered into the clearing process but is subsequently returned to the payee without payment. The most common reason for this is insufficient funds in the payer’s account. When this occurs, the bank usually stamps the cheque with “refer to drawer” or another similar term to indicate that the cheque was not honoured.
Key Points
- Clearing Process: The routing and settlement process through which a cheque moves from the payor’s bank to the payee’s bank.
- Insufficient Funds: A common reason for a cheque being unpaid is that there are not enough funds in the drawer’s (payer’s) account to cover the amount written on the cheque.
- Refer to Drawer: A notification on the unpaid cheque indicating that the drawee bank is referring the payee back to the drawer (payor) due to non-payment.
Examples
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Insufficient Funds: John writes a cheque for $500. When the cheque is deposited, it is sent through the clearing process, but John’s bank account only has $300. The cheque is returned unpaid to the payee due to insufficient funds.
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Bank Account Closure: Sarah writes a cheque, but before it is presented, she closes her bank account. When the payee tries to deposit the cheque, it is returned unpaid since the account no longer exists.
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Signature Mismatch: Tom writes a cheque, but signs it incorrectly. The bank refuses to honor the cheque due to the signature not matching with the records and marks it as “refer to drawer.”
Frequently Asked Questions (FAQs)
What should I do if I receive an unpaid cheque?
If you receive an unpaid cheque, contact the drawer (payer) to inform them of the issue. They may need to resolve the issue with their bank or provide an alternative form of payment.
Can an unpaid cheque be resubmitted to the bank?
Yes, once the issue has been resolved, an unpaid cheque can sometimes be resubmitted. However, it is prudent to confirm with the drawer that the problem has been rectified before doing so.
What does ‘refer to drawer’ mean on an unpaid cheque?
‘Refer to drawer’ indicates that the bank is directing the payee to contact the drawer (payor) as it was unable to process the cheque, often due to insufficient funds or other issues.
Can I be charged for issuing an unpaid cheque?
Yes, many banks impose fees on accounts that attempt to issue cheques without sufficient funds, often referred to as Non-Sufficient Funds (NSF) fees.
Can an unpaid cheque impact my credit score?
An unpaid cheque itself may not directly impact your personal credit score, but if it results in legal actions or collection activities, it could eventually affect your credit rating.
Related Terms
- Clearing: The process through which a cheque is transferred from the payee’s bank to the payer’s bank and settled.
- Non-Sufficient Funds (NSF): A situation where a bank account does not have enough money to cover a cheque that has been presented for payment.
- Drawer: The person who writes the cheque and orders the bank to pay a specified amount to the payee.
- Drawee: The bank on which the cheque is drawn and which is instructed to pay the amount mentioned on the cheque by the drawer.
- Bounced Cheque: A phrase commonly used for an unpaid cheque that cannot be processed due to insufficient funds or other issues.
Online References
- Investopedia: What Is a Dishonored Check?
- The Balance: How to Handle a Bounced Check
- Bankrate: NSF Fee
Suggested Books for Further Studies
- Principles of Accounting by Belverd E. Needles, Marian Powers
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- Financial Accounting: An Introduction to Concepts, Methods and Uses by Roman L. Weil, Katherine Schipper, Jennifer Francis
Accounting Basics: “Unpaid Cheque” Fundamentals Quiz
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