Parts of Cheque

A cheque is a written order from an account holder (drawer) to their bank (drawee), instructing the bank to pay a specific amount to a person or entity (payee). While digital payments have gained popularity, cheques are still widely used in various transactions due to their simplicity and legal significance. Let’s break down every part of a cheque in greater detail:

1. Drawer

  • Who is the Drawer?
    • The drawer is the person or organization who owns the bank account from which the money is to be withdrawn.
    • For example, if “John Doe” writes a cheque, John is the drawer.
  • Key Features of the Drawer’s Role:
    • Their name and account details (such as the account number) are usually pre-printed on the cheque.
    • The drawer is responsible for signing the cheque, ensuring funds are available in their account, and filling in all necessary details correctly.

2. Payee

  • Who is the Payee?
    • The payee is the person or organization to whom the cheque is issued.
    • For instance, if John writes a cheque to “ABC Ltd.,” ABC Ltd. is the payee.
  • Important Points for the Payee:
    • The payee’s name must be written clearly in the space provided on the cheque.
    • If the cheque is crossed and marked as “Account Payee Only,” it ensures the funds can only be deposited into the named payee’s bank account, adding an extra layer of security.

3. Drawee

  • Who is the Drawee?
    • The drawee is the bank or financial institution where the drawer holds an account and where the cheque can be presented for payment.
  • Key Features:
    • The drawee’s details, including the bank name and branch address, are pre-printed on the cheque.
    • The drawee bank verifies the cheque’s authenticity and ensures sufficient funds are available in the drawer’s account before processing the payment.

4. Date of Issue

  • What is the Date of Issue?
    • The date indicates when the cheque was written and becomes valid for use.
  • Key Considerations:
    • Cheques typically expire after a certain period. For example:
      • In the UK, cheques are valid for six months from the date of issue.
      • In Australia, they are valid for 15 months.
    • Post-dated cheques (dated in the future) cannot be processed until the specified date.
    • An antedated cheque (dated in the past) may still be valid, provided it falls within the validity period.

5. Amount of Currency

  • What is the Amount?
    • This is the value to be paid, written in both numbers and words.
  • Why Write the Amount Twice?
    • Writing the amount in both formats (e.g., “£150.00” and “One Hundred Fifty Pounds Only”) reduces errors and helps prevent fraud.
    • If there’s a discrepancy between the two, banks may use the written words as the correct amount.

6. Signature of the Drawer

  • What is the Drawer’s Signature?
    • The signature is the drawer’s authorization for the bank to process the cheque.
  • Key Facts:
    • The bank compares the signature on the cheque with the drawer’s specimen signature on file to confirm authenticity.
    • A mismatch or missing signature can result in the cheque being rejected.

7. Cheque Number

  • What is the Cheque Number?
    • A unique identifier printed on every cheque for tracking and record-keeping purposes.
  • Purpose:
    • Ensures each cheque is processed only once.
    • Helps identify individual cheques in case of disputes or fraud.

8. Machine-Readable Information (MICR Code)

  • What is the MICR Code?
    • MICR (Magnetic Ink Character Recognition) is a system of machine-readable characters printed at the bottom of the cheque.
  • Key Components:
    • Bank Sort Code: Identifies the drawee bank and branch.
    • Account Number: Links the cheque to the drawer’s account.
    • Cheque Number: Matches the cheque with the corresponding record.
    • The MICR code enables efficient processing and reduces errors in cheque clearing.

Additional Security Features

Crossing a Cheque

  • What Does It Mean?
    • A crossed cheque has two parallel lines marked across it, indicating that it cannot be cashed directly but must be deposited into a bank account.
  • Types of Crossing:
    • General Crossing: Contains just the parallel lines.
    • Restrictive Crossing: Includes additional instructions like “Account Payee Only,” ensuring payment is made only to the specified payee.

Additional Information on Cheques

Counterfoil or Stub

  • What Is It?
    • A stub is a record-keeping section attached to the cheque that remains in the chequebook after the cheque is detached.
    • It includes details like the date, payee name, and amount.

Memo Line (Not Common in the UK)

  • What Is It For?
    • In some countries (e.g., the US), a memo line is used to indicate the purpose of the cheque.
    • In the UK, notes are typically written on the reverse side of the cheque.

Remittance Advice

  • What Is It?
    • A document accompanying the cheque to clarify its purpose, often used in business transactions to specify which invoice or account to credit.

How Cheques Are Processed

  1. Cheque Deposit:
    • The payee deposits the cheque into their bank account.
    • Some banks allow mobile deposits via smartphone apps.
  2. Routing and Clearing:
    • The payee’s bank sends the cheque to the drawee bank through a clearinghouse.
    • The MICR code helps automate this process.
  3. Verification:
    • The drawee bank verifies details, including the drawer’s signature and available funds.
  4. Payment:
    • If all checks are cleared, the drawee bank transfers the amount to the payee’s account.