How do cheques work?

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Let’s understand how cheques work. A cheque is a promise made in writing by one person to another to unconditionally pay a specified amount of money. However, you can also write a cheque to yourself.

For example, if Amit owes Asha Rs. 10,000, he can give Asha a cheque of Rs. 10,000. When Asha presents this cheque to the bank, she will receive Rs. 10,000 as cash or in her bank account. Rs. 10,000 will be deducted from Amit’s account.

In technical terms, as used by bankers and lawyers, a cheque is also referred to as and is a type of a ‘Negotiable Instrument’.

The different parties involved in dealing with a cheque are:

The issuer of the cheque (Drawer)
The payee/holder of the cheque and
The bank (Drawee)

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Encash a cheque

Process of encashing a cheque depends on whether it is a bearer cheque or order cheque. There are multiple modes for the same.

Endorsing cheques

By endorsing the payee can use the same order cheque to pay to someone else by writing that person’s name behind the cheque and signing it.

Cheque Bouncing

A cheque is said to have been ‘bounced’ or ‘dishonoured‘ is when it is deposited or presented for payment but could not be encashed by the holder of the cheque.

Order Cheque

An order cheque is a cheque where only the person or party in whose name the cheque has been drawn, can withdraw the cash.

Cheque Truncation System

Cheque truncation is a form of cheque clearing system. It digitises a physical paper cheque into a substitute electronic form.

Crossed Cheque

Crossing a cheque means that it cannot be transferred to anyone else. These cheques can only be credited to the payee’s account.