Types Of Cheque, Definition, Characteristics, Advantages

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In this class I will be taken you on the Topic: Meaning and Types of Cheque in Economics

OVERVIEW OF CHEQUE: Definition, features or characteristics of a cheque, advantages of payment by cheque, precautionary measures to be taken when drawing a cheque, parties to a cheque, types of cheque. Forms of cheque and reasons why a bank may dishonor a cheque.

READ ALSO – Types of Bank Accounts: Features and Differences

Table Of Content

  1. Definition of Cheque
  2. Characteristics of cheque
  3. Advantages of payment by cheque
  4. Parties to cheque
  5. Types of cheque

Definition Of Cheque

Definition: The bill of exchange act define a cheque as a bill of exchange drawn on a bank payable on demand. A cheque is an order written by the drawers to a bank to pay on Demand a specified some of money to the person named as payee on the cheque. To complete a cheque, the drawer writes the name of the payee, the amount he is to be paid in words and figures, date and signature.

Features Or Characteristics Of A Cheque

  1. A cheque is an order to pay.
  2. It is an unconditional order
  3. The amount must be specified.
  4. It must be in writing not Oral.
  5. The account number of the drawer is stated.
  6. The name of the branch of the bank appear on the cheque.
  7. It is addressed by one person to another.
  8. The name of the payee must be shown on the cheque.
  9. A stamp duty is paid on a cheque.
  10. Amount must be clearly written in words and figures.

ADVANTAGES OF PAYMENT BY CHEQUE

  1. Convenience: It is more convenient to carry cheque about than cash.
  2. Safe means of payment: Cheque is a safe means of payment, especially when it is crossed, the risk of loss is eliminated.
  3. A proof of payment: Cheque can serve as a receipt and a proof of payment.
  4. Saves time and energy: Using cheque to pay large sums of money save time and energy of counting cash.
  5. Helps to economize: Cheque can help to economize the use of currency notes and coins.
  6. Security: It is safer to carry cheque than cash for security reasons.
  7. For record purposes: The drawer can use the counterfoil for keeping proper record of payments and receipts.
  8. Easy to stop payments: It is very easy for the drawer to stop payment so as to prevent fraud.

Precautionary measures to be taken when drawing a cheque

  1. The signature must be consistent.
  2. The drawer must sign any alteration on the cheque.
  3. The cheque must not be folded.
  4. The amount must be written in figures and words.
  5. The name of the payee should be properly written on the cheque.
  6. The signature must be such that cannot be easily forged.

PARTIES TO A CHEQUE

Drawer: This is the person responsible for drawing a cheque. Is the owner of the account on which the cheque is drawn. The drawer is the debtor who signs the cheque and orders the bank to pay his creditors.

Drawee: This is the bank on which the Cheque is drawn, i.e, the bank where the cheque will be presented for cash.

Payee: This is a person to whom the Cheque is made payable, i.e, the person to whom payment is directed to be made. The payee is usually a creditor to the drawer and must present the cheque to the drawee for settlement. For example, Mr Atey writes a cheque to Mr John to be drawn from City bank. In this transaction Mr Atey is the drawer and Mr John is the payee while City bank is the drawee.

Types of cheques
Types of cheques

TYPES OF CHEQUE

  1. Order cheque: Order cheque is one of the types of cheque made payable to a person or firm named on it, or an order which requires the endorsement of the payee unless he pays it into his own bank account. A cheque that is drawn payable to payee or to order can only be cashed by the payee. The payee can endorse it to another person and this turns in into a bearer cheque.
  2. Bearer cheque: Bearer cheque is payable to the bearer, i.e, whoever present it. The bearer Cheque is payable without any endorsement. It can be cashed over the counter without having to be endorsed by the person presenting it.
  3. Open cheque: Open cheque is another types of cheque which can be presented and cashed over the counter of the bank which it is drawn. Open cheque is not crossed. It is used for drawing cash from the bank and paying creditors who have no current account. This is risky because it can be paid to a wrong person.
  4. Crossed cheque: A crossed cheque is one that has two parallel transverse lines drawn across its face with or without the word Co. Ltd or not negotiable. In order words it is a cheque having two parallel lines drawn across its face. Crossed cheque Cannot be cashed at the counter, it must be paid into a current account. Some wards may be written between the parallel lines, e.g, & Co. or non-negotiable etc. This helps to prevent fraudulent practices.

Features that can be seen on the cheque

  • The payable
  • The drawee
  • Amount in words
  • Signature of drawer
  • Date
  • Amount in figure
  • Account number

Clearing Cheque

Definition: Clearing of cheque is the procedure through which a bank collects the process of a cheque issued on another bank in favour of its own customers.

Forms Of Crossing

There are several types of crossing which can be used to place restriction on the negotiability of a cheque. They are:

A. General crossing: general crossing is a form of crossing in which two parallel transverse lines are drawn across the face of the cheque with or without the addition of the word & Co. or not negotiable. This type of crossing prevents payment over the counter. The Cheque can be paid into current account. There is no bank name on it.

B. Special crossing: In special crossing, the name of a bank is inserted between the transverse lines. This restricts payment to a specific named bank. The effect is to make the cheque payable only to the banker specified in the crossing. It is a precautionary measures to make a Cheque safer.

Order forms of special crossings are:

  • Non-negotiable: Non-negotiable is another form of crossing in which the cheque cannot be paid to any person except the bearer of the name on the cheque. This phrase with deprive the cheque of its negotiability, i.e, prevents its further transfer. It is added to protect the owner against thieves.
  • A/c Payee Only: A/c is a direction to the bank that the proceeds of the cheque are to be paid only into the account of the person or firm named on the cheque, i.e, the payee. Any Cheque with this form of crossing cannot be negotiated or transferred by endorsement to another person. It operates as notice to the collecting bank that only the account of the payee is to be credited.

Reasons for crossing a cheque

  1. It protects the owner against damaged by loss or theft.
  2. It prevents the cheque from being paid over the counter.
  3. Crossing restricts a cheque to a particular bank.
  4. The holder must pay it to his account.
  5. It can help in tracing the culprit in case the check was stolen.

Order forms of cheques

  1. Stale cheque: Stale cheque is a forms cheque which has been in circulation for an unreasonably long time, hence the date of presentation for payment has expired. The bank will refuse to Honor a cheque that is more than 6 months old because it is considered expired.
  2. Post dated cheque: These are the forms of cheques that bear a date later than the current date on which they are drawn, i.e, it is dated for some Future time. Such a Cheque cannot be cashed before the proper date.
  3. Certified cheque: A certified cheque is a cheque which has been ratified by the bank in order to guarantee that the drawer has sufficient funds in the account to settle debt. Bank also ratifies a cheque in order to authenticate it.
  4. Dishonoured cheque: A dishonoured cheque is one which a banker, for some reasons, has refused to pay on presentation. Such cheques generally have some explanatory phrase written on them.

Reasons why a bank may dishonor a cheque

A bank may dishonour a cheque if the following happens:

  • When payment is stopped by owner before encasement.
  • When a post date cheque is presented earlier than the date written on it.
  • When the cheque is more than 6 months from the date written on it.
  • When the bank has noticed of the death of the drawer before the cheque is presented.
  • When the court declares the drawer bankrupt before the Cheque is presented.
  • When the signature on the cheque differs from the one on the signature card at the bank/irregular signature.
  • When there are not enough funds in the drawer’s account to cover the sum stated on the cheque.
  • When there is an alteration on the cheque and the alteration is not initiated by the drawer.
  • When the cheque is defaced or torn.
  • When the amount stated in words and figures disagree.
  • When the account of the drawer has been closed before the Cheque is presented for payment.
  • When did cheque not dated.
  • When there is a notice that the customer is not normal.

READ ALSO – Characteristics and Functions of Commercial Bank

Revision Questions

  1. What is a cheque?
  2. State the features and characteristics of a cheque.
  3. State the types of cheques.
  4. List and explain the advantages of payment by cheque.
  5. What are the reasons why bank may dishonor a cheque?
  6. What are the reasons for crossing a cheque?
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