Cheque: A Banking Instrument

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A cheque is a coming instrument in the banking sector in today’s economy. We will be looking at the meaning of a cheque, features of a cheque, advantages of using a cheque and as well as precautionary measures in using a cheque.

Lesson Objectives

By the end of the lesson, students should be able to:

1. Explain what a cheque is and describe its main features.

2. Identify the advantages of paying with a cheque and list the safety measures to follow when writing one.

What is a Cheque?

A cheque is a written instruction that an account holder gives to a bank, telling the bank to pay a specific amount of money to a named person or to the bearer of the cheque.

It is not money by itself, but an order that allows the transfer of funds from the drawer’s account to the payee once the bank confirms that all conditions for payment are met.

A bank note and a cheque are different because a cheque is only a payment instruction, while a bank note is actual money issued by the central bank.

A cheque cannot be used to buy goods directly, and it may be rejected if there are errors or insufficient funds, while a bank note is a legal tender that must be accepted for payment.

Moreso, a cheque requires a bank account, but a bank note can be used by anyone without any conditions.

Features of a Cheque

1. Date: The date on a cheque shows the exact day the cheque was written. It helps the bank know when the cheque becomes valid for payment. A cheque without a date may be rejected because the bank cannot confirm when it was issued. If the date is in the future, the cheque becomes a post-dated cheque and cannot be paid until that day comes. The date also helps prevent stale cheques that become invalid after six months.

2. Name of the Payee: The name of the payee is the name of the person or organisation that should receive the money. This feature tells the bank who the payment is intended for. Writing the correct payee name helps prevent fraud and ensures the money goes to the right person. If the name is unclear or wrongly spelled, the bank may delay payment because it needs to confirm the identity of the receiver.

3. Amount in Words: The amount in words shows the exact sum the drawer wants the bank to pay. This part is very important because banks rely on it when there is a difference between the words and figures. Writing the amount in words helps avoid confusion and errors. It must be written clearly without leaving spaces at the beginning or end to prevent unauthorised additions.

4. Amount in Figures: Again, the amount in figures is the numerical form of the money to be paid. For example, writing “₦10 000” in figures makes the value easy for the bank to read. It supports the amount written in words and allows the bank to double-check for accuracy. If the figures and the words do not match, the bank will depend on the words because they are harder to alter.

5. Name and Signature of the Drawer: The drawer’s name and signature identify the account holder issuing the cheque. The bank uses the signature to confirm that the cheque is genuine and approved by the right person. If the signature does not match the one kept in the bank’s records, the cheque will be rejected. The drawer’s details also help trace the cheque back to the correct account.

6. Cheque Number: The cheque number is a unique code printed on every cheque. It helps the bank track and record the movement of the cheque. This number is useful for keeping proper bank statements and detecting lost or stolen cheques. The cheque number also helps both the bank and the account holder monitor which cheques have been used or still remain in the cheque book.

7. Name of the Bank and Branch: Every cheque shows the name of the bank and the branch where the drawer has an account. This information tells the bank officials where the cheque should be processed. It also helps in clearing cheques between different banks. If there is any issue with the cheque, the bank can trace it back to the specific branch that issued the cheque book.

8. Drawer’s Account Number: The account number links the cheque to the drawer’s bank account. It tells the bank exactly which account should be debited when the cheque is presented. This helps prevent mistakes, especially when a customer has more than one account in the same bank. Without a correct account number, the bank may reject the cheque or process it incorrectly.

Advantages of Payment by Cheque

1. Safe to carry because it is not cash. A cheque reduces the risk of moving around with physical money. If cash gets lost or stolen, it is gone forever. A cheque, however, can be cancelled or stopped by the bank if something goes wrong. This makes it safer for individuals and businesses when handling payments, especially in busy or risky environments.

2. Useful for paying large amounts. Carrying a large sum of money can be unsafe and uncomfortable. A cheque makes it easy to pay large amounts without carrying bundles of cash. With one slip of paper, the bank can transfer the exact amount to the payee, making the process simple and secure for large transactions such as school fees, rent, or business purchases.

3. Provides a record of payment. Every cheque leaves a clear record in the bank, which helps in tracking payments. The drawer and the payee can always refer to the cheque number and bank statements to confirm when the payment was made. This makes cheques useful for accountability, bookkeeping, and resolving disagreements about money.

4. Can be posted or transferred easily. A cheque can be sent through the mail or handed over without difficulty. This makes it convenient when the payer and receiver are in different places. Instead of travelling to deliver cash, a person can simply write a cheque and send it, saving time and transport costs while making the payment process easier.

5. Helps reduce the risk of theft or loss. Using cheques instead of cash lowers the chances of losing money. Even if someone steals the cheque, they cannot easily cash it, especially if it is crossed or written to a specific person. This protection makes cheques a more secure method of payment for individuals, firms, and organisations.

Precautionary Measures When Drawing a Cheque

1. Write clearly to avoid alterations. When writing a cheque, the words and figures must be clear so that no one can change them easily. If the handwriting is rough or unclear, someone could alter the amount or the name of the payee. Clear writing protects both the drawer and the bank because it reduces mistakes and prevents fraud. A well-written cheque helps the bank process payment without confusion.

2. Do not leave spaces before or after writing amounts. It’s worth knowing that when writing the amount in words or figures, it is important to start from the very beginning of the line and end with a stroke or dot. Empty spaces give room for criminals to add extra digits or words to increase the amount. For example, someone could turn “One thousand” into “One thousand five hundred”. Closing all gaps ensures that the cheque cannot be tampered with.

3. Cross the cheque when necessary for safety. Crossing a cheque means drawing two diagonal lines on it. This prevents the cheque from being cashed at the counter by anyone. It must be paid into a bank account, which creates a record of the transaction. Crossing cheques is a simple way to reduce the risk of loss or theft because even if someone steals the cheque, they cannot easily get the money.

4. Sign the cheque exactly as used on the bank record. Banks keep a sample of the customer’s signature. When a cheque is presented, the bank compares the signature to the one it has on record. If the signature is different, the bank will reject the cheque. To avoid dishonor, the drawer must always sign the same way. This helps verify identity, prevents fraud, and ensures smooth payment.

5. Keep cheque books in a safe place. A cheque book is a sensitive financial document because anyone who gets hold of it can attempt to write and cash a cheque illegally. Keeping the cheque book in a secure place protects the account holder from fraud, theft, and loss. It also prevents unauthorized people from filling out cheques in the drawer’s name.

6. Cancel mistakes by drawing a neat line and signing beside it. If a mistake is made on a cheque, it should not be erased or scratched. Instead, a neat line should be drawn through the error, and the drawer must sign beside the correction. This shows the bank that the drawer authorized the change. Without this signature, the bank may think the cheque was tampered with and refuse to make payment.

Final Thoughts

• A cheque is a written instruction to a bank to pay a specific amount to a person or organization.

• Features of a cheque include date, payee name, amount in words and figures, drawer’s signature, cheque number, and bank details.

• Advantages of paying by cheque: safe, convenient for large sums, provides a record, and reduces theft risk.

• Precautions when drawing a cheque: write clearly, avoid spaces, cross for safety, sign properly, and store cheque books securely.

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Tags

Cheque, Bank note, Drawer, Drawee, Payee, Order chequeA cheque is a coming instrument in the banking sector in today’s economy. We will be looking at the meaning of a cheque, features of cheque, advantages of using a cheque and as well as precautionary measures in using a cheque.