B2: 2.01(a) Cheques

What is a cheque?

Cheques are a paper based system used by bank account holders to pay money from their current bank accounts. Whilst cheques are not as widely used as in the past, there are still hundreds of millions issued each year in the UK.

A cheque contains instructions to a bank to make payment to a named individual or organisation for a stated amount.

What does a cheque look like?

Each bank uses their own format for cheques but they all contain similar information. An example is shown below:

Terminology used

DraweeThe drawee is the bank that holds the account. The drawee for the above example is the Bank of Mirth plc
DrawerThe drawer is the account holder. The drawer for the above example is Reyking Ltd
PayeeThe payee is the person or organisation to whom money will be paid. The payee in the above example is Jane Doe.
Sort code and account numberA sort code and account number form a unique code which identifies the bank account the payment will be made from.
Cheque numberEach cheque will include a unique sequential number that identifies the particular cheque used
Cheque bookA series of cheques bound together for use by the account holder. Cheques are torn out from the cheque book leaving cheque book stubs behind
Cheque book stubCheque book stubs are included in the cheque book and are completed with information about the cheques that have been paid

Completing a cheque

The following should be entered on a cheque in order to make payment

  1. The name of the individual, business or organisation to be paid
  2. The amount of the payment which should be written in both figures and words
    1. These two ways of expressing the amount must agree with one another
    2. When the amount is written in words you may still write any pence as numbers, for example, £83.65 could be written as “Eighty three pounds and 65p”
  3. The cheque should be dated
    1. If a cheque is completed with a future date we describe as being “post-dated” and the recipient will not be able to bank the money until the recorded date is reached.
    2. If the date on a cheque is more than six months old it will not be accepted by a bank. Instead the recipient will have to ask for another cheque or ask for payment using alternative means
  4. The cheque must be signed by an authorised individual. This is usually the name of the account holder but this is not possible where the account holder is a company. Note also that some businesses and organisations have bank accounts that require cheques to be signed by more than one authorised person

Paying by cheque

When a business makes a payment by cheque it will provide the recipient, or payee, with a completed cheque. The recipient will then take the cheque to a branch of their bank or alternatively, will take a picture of the cheque and will submit it to their bank electronically using software provided by their bank.

When the cheque is received by the recipient’s bank, it will contact the business’ bank and ask that the money is sent to them. Assuming that security checks are met and the business’ bank holds sufficient funds for the payment to be made, the funds will then be transferred.

How long does the process take?

When a cheque is paid into a bank account (either at a branch or electronically) by 15.30 the funds should be available by 23:59 on the next weekday.

It is therefore important to remember that when a cheque is paid the money will not leave the bank account immediately. The cheque might be in the post for some time, the recipient might not bank the cheque on the same day it is received and even when the cheque is submitted to the payee’s bank it will still take time to be processed. Likewise, when a cheque is received the amount will not clear into the business’ account immediately.

Dishonoured cheques

If a business or individual writes a cheque for an amount that is greater than the available funds in the bank account the bank may decide not to pay it. The cheque would then be described as a dishonoured cheque or alternatively, a bounced cheque.

Adverse consequences of writing dishonoured cheques

It is important that businesses avoid issuing cheques that will be dishonoured as there are a number of adverse consequences.

  1. It damages the relationship with the recipient of the cheque. It indicates that the business may have financial problems and a supplier that receives a dishonoured cheque is likely to review its willingness to deal with the business and the credit terms it offers
  2. It damages the relationship with the bank. It indicates that the business might have difficulties managing their cash and thereby increase the likelihood of the bank refusing to offer or renew bank services such as overdraft facilities or loans
  3. Bank charges are incurred for each dishonoured cheque
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