Cheque

From Wikinvestor

A cheque or check is a negotiable instrument^[1] instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities.

Contents 1 Parts of a cheque 2 Types of cheques in the United States 3 External links 4 Footnotes

Parts of a cheque

Cheques generally contain:

1. place of issue
2. cheque number
3. date of issue
4. payee
5. amount of currency
6. signature of the drawer
7. routing / account number in MICR format - in the U.S., the routing number is a nine-digit number in which the first 4 digits identifies the U.S. Federal Reserve Bank's cheque-processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9 is a verification digit, computed using a complex algorithm of the previous 8 digits. The account number is assigned independently by the various banks.^[2]
8. fractional routing number (U.S. only) - also known as the transit number, consists of a denominator mirroring the first 4 digits of the routing number. And a hyphenated numerator, also known as the ABA number, in which the first part is a city code (1-49), if the account is in one of 49 specific cities, or a state code (50-99) if it is not in one of those specific cities; the second part of the hyphenated numerator mirrors the 5th through 8th digits of the routing number with leading zeros removed.^[2]

A cheque is generally valid indefinitely or for six months after the date of issue unless otherwise indicated; this varies depending on where the cheque is drawn. In Australia, for example, it is fifteen months ^[3]. Legal amount (amount in words) is also highly recommended but not strictly required.

In the USA and some other countries, cheques contain a memo line where the purpose of the cheque can be indicated as a convenience without affecting the official parts of the cheque. This is not used in Britain where such notes are often written on the reverse side.

Types of cheques in the United States

In the United States, cheques are governed by Article 3 of the Uniform Commercial Code.

• An order check — the most common form in the United States — is payable only to the named payee or his or her endorsee, as it usually contains the language "Pay to the order of (name)."
• A bearer check is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the cheque is payable to someone who is not a person or legal entity, e.g. if the payee line is marked "Happy Birthday".
• A counter check is a bank cheque given to customers who have run out of cheques or whose cheques are not yet available. It is often left blank, and is used for purposes of withdrawal.

In the United States, the terminology for a cheque historically varied with the type of financial institution on which it is drawn. In the case of a savings and loan association it was a negotiable order of withdrawal; if a credit union it was a share draft. Checks as such were associated with chartered commercial banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check means any or all of these negotiable instruments. Certain types of cheques drawn on a government agency, especially payroll cheques, may also be referred to as a payroll warrant.

External links

• Bank and account identifiers on U.S. cheques: ABA / Routing / Transit
• Cheque and Credit Clearing Company - the organisation that manages the cheque clearing system in the UK
• Cheques found in the Cairo Geniza from the 12th century
• Information on cheques in the UK from APACS

UK Legislation

• Bills of Exchange Act 1882
• Cheques Act 1992
• Cheques Act 1957

Footnotes

1. ↑ Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only, but in an effort to combat financial crime, many countries have provided by a combination of law and regulation that all cheques should be treated as crossed, or account payee only, and are not negotiable.
2. ↑ ^{2.0 2.1} supersat_tech: Inside Check Numbers
3. ↑ "Legal Issues Guide for Small Business - cheques". Retrieved on 2007-05-24.