Types of cheque - SS2 Commerce Lesson Note
A cheque is a written document that instructs a bank to pay a specific amount of money from the account of the person or organization issuing the cheque to the recipient. It serves as a substitute for carrying large amounts of cash and provides a convenient way to make payments.
Parties to a cheque:
Drawer: The person or organization that writes and issues the cheque is called the drawer. They have a bank account from which the funds will be withdrawn when the cheque is presented for payment.
Payee: The payee is the individual or business who will receive the payment specified on the cheque. They are the intended recipient of the funds mentioned in the cheque.
Drawee: The drawee is the bank or financial institution where the drawer holds an account. The drawee bank is responsible for honoring the cheque and making the payment to the payee, as long as there are sufficient funds in the drawer's account.
Types of cheques:
Order Cheque
An order cheque is a type of cheque that can only be paid to the specific person or entity mentioned on the cheque as the payee. The payee's name is usually written on the "pay to the order of" line. It requires the payee to endorse or sign the back of the cheque to receive the payment. Order cheques provide a higher level of security because they can only be encashed by the intended recipient.
Bearer Cheque
A bearer cheque is a type of cheque that is payable to the person who possesses or bears the physical document. Unlike an order cheque, it does not have the payee's name mentioned on it. The bearer of the cheque can simply present it at the bank and receive the payment. Bearer cheques are considered less secure because anyone who possesses the cheque can cash it, even if they are not the intended recipient.
Open Cheque
An open cheque is a type of cheque that is not crossed or marked with "Account Payee Only" instructions. It can be encashed over the counter at the bank by the payee or bearer. Open cheques do not have any specific restrictions on how they can be processed, making them more flexible in terms of payment.
Crossed Cheque
A crossed cheque is a cheque that has two parallel lines drawn across the top left corner or across the face of the cheque. It signifies that the cheque can only be deposited into a bank account and cannot be encashed over the counter.
Crossed cheques provide an added layer of security as the payment is directly credited to the payee's account, reducing the risk of loss or theft. Crossed cheques can have additional variations:
General Crossing: The parallel lines are drawn simply to indicate that the cheque is crossed and should be deposited into a bank account.
Account Payee Crossing: The words "Account Payee" are written between the parallel lines, instructing the bank to only credit the funds to the account of the payee mentioned on the cheque. It prevents the cheque from being transferred or endorsed to another person.