Cheque and Demand draft(DD) are negotiable instrument, both are mechanism
used to make payments.
A cheque is a Bill of Exchange drawn on a specified banker and not expressed to
be
payable
otherwise
than
on
demand.
The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank
acts as guarantor to make payment in full when the instrument is presented.
In business transaction cheque is not usually accepted as the drawer and payee
and unknown and there will be credit risk. So, in such cases Demand draft where
transfer of money is guaranteed.
Here are few basic difference between cheque and DD
1.) Cheque is issued by customer, whereas Demand draft issued by bank
2.) In cheque payment is made after presenting cheque to bank, while in DD is
given after making payment to bank.
3.) Cheque can bounce due to insufficient balance . DD cannot be dishonored as
amount is paid before hand.
4.) Payment of cheque can be stopped by drawee, whereas payment cannot be
stopped in DD.
5.) A cheque can be paid to bearer or order. While, DD is paid to person on order.
6.) In cheque drawer and payee are different person. In DD, both parties are
banks.
7.) A cheque needs signature to transfer amount, While DD does not require
signature to transfer funds
However, banks do charge certain amount depending on the amount on Demand
draft. Outstation cheque are also charged.
A cheque can be made payable to bearer but a Demand Draft cannot. A demand draft can be cleared in a
specified branch of the issuer bank A cheque can get dishonored but Demand draft is always honored. An
issuer party of the cheque is liable to the cheque and not backed by a Bank Guarantee, A demand draft is
backed by a bank guarantee
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Drafts vs Checks
Any industry or business can produce a bank draft. A bank draft is a legitimate copy
of a check that is created by the businessman or merchant and authorized by the bank
but not created by the account holder. A bank draft does not have an original
signature. It is normally signed by an automated machine. It is also based on real
credit or savings in the account. Once the draft is produced, your real money is used.
A bank draft can be noted as a banks check. The money will be paid by the bank so
that the account holder can redeem it as a draft. A bank draft is always a confirmed
payment therefore it will not bounce. The bank takes the money in advance from the
person who issues a draft and in return gives a banks check or draft for that amount.
Drafts are a more reliable form of receiving payment than personal checks that may
bounce. As mentioned, a draft is as good as cash. The bank writes the account holders
draft and reliably takes out money from the account.
Checks are created by the account holder on funds inside the account or held in
acquisition. It should be signed officially by the account holder before releasing.
However, banks are allowed to seize back money or funds from a cleared check a
week or two soon after if consequent transactions are accounted as fraud or
counterfeit.
Checks attribute the name of the issuing bank which normally appears in the upper
left-hand or upper center of the check. Furthermore, it includes enhanced security
features including color-shifting ink, security watermarks, and thread special bond
paper. Checks are well designed to decrease the susceptibility of counterfeit items.
Some banks bond out the protection of their checking accounts and checks issued to
their account holders. Checks may bounce, and they are also prone to other counterfeit
and fraudulent activities.
Summary:
1.A bank draft is a legal copy of a check that is created by the merchant and then
authorized by the bank but not created by the account holder. Checks have a
clearing period before
the
issuance.
2.Drafts are assured and confirmed money. Checks need time (if there are funds)
before
they
can
be
cleared
and
approved.
3.Drafts are highly protected by the bank. They also avoid risks in taking out money
while checks are prone to fraudulent activities and counterfeiting acts.
4.A bank draft reliably takes out money from the account while checks need
authorization
by
the
bank
and
the
account
holder.
5.A bank draft does not have a signature; it normally is signed by an automated
machine. Checks are signed by the account holder before the release.
6.Drafts are based on real credit and money in the account; once the draft is produced
your money is used. Checks are assigned payments; therefore, funds can be
insufficient. It can bounce.
A bank draft is a written order in the form of a check instructing the
payment of money from one bank account to another. The bank
draft is drawn by one bank against funds that it has deposited in an
account at a second bank. The first bank is giving its consent for the
second bank to release funds or make payment to the individual
named on the bank draft. A bank draft is usually more acceptable to
a payee than a personal check. Other terms for bank draft are draft,
bill of exchange, order of payment, banker's draft and negotiable
instrument. A bank draft is similar in form to the common bank
check. Frequently, a bank draft is used to transfer funds and to
settle outstanding balances between banks.
Similarities
They are Negotiable Instrument.
Addressing the drawee to make payment.
Always in writing.
Signed by the drawer of the instrument.
Express order to pay a certain amount.
Difference Between Cheque and Bill of Exchange
April 7, 2015 By Surbhi S Leave a Comment
Cheque is an instrument which contains an unconditional order, drawn on a
banker, directing to pay a certain sum of money to the person whose name is
specified on the instrument. Bill of Exchange is a document contains an
unconditional order, directing a person, to pay a certain amount to a specified
person. These two terms sounds the same, which becomes the cause of confusion
for many people. Come, lets start understanding the difference between Cheque
and Bill of Exchange.
Content: Cheque Vs Bill of Exchange
1. Comparison Chart
2. Definition
3. Key Differences
4. Similarities
5. Conclusion
Comparison Chart
BASIS FOR
COMPARISON
CHEQUE
BILL OF EXCHANGE
Meaning
A document used to make easy
payments on demand and can be
transferred through hand delivery
is known as cheque.
A written document that
shows the indebtedness of
the debtor towards the
creditor.
Defined in
Section 6 of The Negotiable
Instrument Act, 1881
Section 5 of The Negotiable
Instrument Act, 1881
Validity Period
3 months
Not Applicable
Payable to
bearer on
demand
Always
Cannot be made payable
on demand as per RBI Act,
1934
BASIS FOR
COMPARISON
CHEQUE
BILL OF EXCHANGE
Grace Days
Not Applicable, as it is always
payable at the time of
presentment.
3 days of grace are
allowed.
Acceptance
A cheque does not require
acceptance.
Bill of exchange needs to
be accepted.
Stamping
No such requirement.
Must be stamped.
Crossing
Yes
No
Drawee
Bank
Person or Bank
Noting or
Protesting
If the cheque is dishonoured it
cannot be noted or protested
If a bill of exchange is
dishonoured it can be
noted or protested.
Definition of Cheque
A cheque is a type of bill of exchange, used for the purpose of making payment to
any person. It is an unconditional order, addressing the drawee to make payment
on behalf the drawer, a certain sum of money to the payee. A cheque is always
payable on demand, i.e. the amount is paid to the bearer of the instrument at the
time of presentment of the cheque. It is always in writing and signed by the
drawer of the instrument.
There are three parties involved in case of cheque:
Drawer: The maker or issuer of the cheque.
Drawee: The bank, which makes payment of the cheque.
Payee: The person who gets the payment of cheque or whose name is
mentioned on the cheque.
It should be noted that the issuer must have an account with the bank. There is a
specified time limit of 3 months, during which the cheque must be presented for
payment. If a person presents the cheque after the expiry of 3 months, then the
cheque will be dishonoured. The various types of cheques are:
Electronic Cheque: A cheque in electronic form is known as electronic
cheque.
Truncated Cheque: A cheque in paper form is known as truncated cheque.
Definition of Bill of Exchange
A bill of exchange is a negotiable instrument, contains an unconditional order,
directing the drawee to pay a certain sum of money to payee addressed in the
instrument. The bill is made and signed by the drawer and accepted by the
drawee. It contains a pre-determined date on which the payment is to be made to
the payee. It can be payable on demand when the bill is discounted with the bank.
The parties to the bill of exchange must be certain.
There are three parties involved in the bill of exchange, they are:
Drawer: The maker of the bill of exchange.
Drawee: A person on whom the bill is drawn, i.e., the person who gives
acceptance to make payment to the payee.
Payee: The person who gets the payment.
There are three days of grace allowed to the drawee, to make payment to the
payee, when it becomes due. You might wonder about the days of grace, lets
understand it with an example: A bill is drawn on 5-10-2014 in the name of X, to
make payment to Y after 3 months. The bill will become due on 5-01-2015, while
the date of maturity is 8-01-2015 because of 3 days of grace are added to it. The
following are the types of bill of exchange:
Inland Bill
Foreign Bill
Time Bill
Demand Bill
Trade Bill
Accommodation Bill
Key Differences Between Cheque and Bill of Exchange
1. An instrument used to make payments, that can be simply transferred by
hand delivery is known as cheque. An acknowledgement prepared by the
creditor to show the indebtedness of the debtor who accepts it for payment
is known as a bill of exchange.
2. A Cheque is defined in section 6 while Bill of Exchange is defined in section
5 of the Negotiable Instrument Act, 1881
3. The drawer and payee are always different in case of cheque. In general,
drawer and payee are the same persons in case of bill of exchange.
4. The stamp is not required in cheque. Conversely, a bill of exchange must be
stamped.
5. A cheque is payable to the bearer on demand. As opposed to bill of
exchange, it cannot be made payable to the bearer on demand.
6. Cheque can be crossed but a Bill of Exchange cannot be crossed.
7. There is no days of grace allowed in cheque, as the amount is paid at the
time of presentment of cheque. 3 days of grace are allowed in bill of
Exchange.
8. A cheque does not need acceptance whereas a bill requires to be accepted
by the drawee.
A cheque differs from a bill of exchange in the following respects:
1. Drawee:
A cheque is always drawn on a bank or a banker while a bill of exchange can be
drawn on any person including a banker.
2. Acceptance:
A cheque does not require any acceptance while a bill must be accepted before the
drawee can be made liable upon it.
3. Payment:
A cheque is payable immediately on demand without any days of grace, but a bill of
exchange is normally entitled to three days of grace unless it is payable on demand.
4. Crossing:
A cheque may be crossed but there is no such provision in the case of a bill of
exchange.
5. Notice of dishonor:
When a cheque is not met, notice of dishonor is not necessary. Want of assets in the
hands of the banker is sufficient notice. It is necessary to give a notice of dishonor in
order to make the drawer of a bill liable.
6. Payable to bearer on demand:
A cheque can be drawn payable to bearer on demand. But a bill of exchange cannot be
so drawn.
7. Stamp:
A bill of exchange must be stamped, whereas a cheque does not require any stamp.
8. Countermanding payment:
A cheque may be revoked by countermand of payment. The payment of a bill,
however cannot be countermanded.
9. Noting and protesting:
A cheque is not noted or protested for dishonor and is generally inland.
10. Presentment:
A bill of exchange must be duly presented for payment otherwise the drawer will be
discharged. The drawer of a cheque is not discharged by failure of the holder to
present it in due time unless the drawer has sustained damage by the delay.
11. Protection:
A banker is given statutory protection with regard to payment of cheques in certain
circumstances. No such protection is available to the drawee or acceptor of a bill of
exchange.
2
Cashier's Checks
A cashier's check is a check purchased with cash or a debit from an
account housed at the bank where the check originates. The check is
issued from one of the financial institution's special accounts reserved
for the sale of cashier's checks, made out to the payee and signed by a
bank officer.
Official, Treasury, and Teller's Checks
Although called by different names, these checks are all cashier's
checks. Regional vernacular as well as titles of bank positions account
for the differences, as really they are just a matter of preference and
impart no additional meaning.
Certified Checks
With a certified check, the bank debits the money from the account
holder and holds it in suspense so it cannot be spent. In turn, the bank
provides a guarantee that the check will clear.
Money Orders
Money orders are typically only available for maximum amounts of
$1,000 or less. A money order is purchased for a specific face value out
of a specialized money order account at the financial institution. It is
signed by the purchaser and the information is filled in by them, unlike a
cashier's check which is issued by the bank.
Traveler's Checks
When a bank sells traveler's checks, these are usually provided through
another company such as American Express or Visa. Traveler's checks
are issued in predetermined denominations and are signed over to
payees. Traveler's checks are typically used in place of cash.
Personal Check
A personal check is the means for the checking account holder to pay
the money. Most banks allow you to write as many checks as you want
per month without a fee, but some banks set a limit on the number of
checks per month and charge a fee if you exceed it.
Business Check
Business owners can open business checking account and issue
business checks. Business checks are similar to personal checks. The
account owner pays for supplies, business expenses and payroll with
business checks. Most banks charge monthly fees for business
checking accounts. They can also limit the number of checks the owner
can write per month.
Cashier's Check
A cashier's check is a check by the bank on its own funds. The bank
takes the money out of an account holder's account and issues the
check from its own account. Businesses prefer cashier's checks for
large purchases. Cashier's checks take less time to clear when
compared with personal checks.
Certified Check
A certified check is similar to a cashier's check. The bank withdraws the
funds from the holder's account and places them into a separate
account until the certified check clears. Some banks charge a fee for a
certified check.
Traveler's Check
Traveler's checks come in specific denominations and were convenient
to use during trips before credit and debit cards have rendered them
nearly obsolete. The bank can replace travelers checks fast if you lose
them, but you need to order traveler's checks ahead of time, pay fees
and get enough checks for the trip. Debit and credit cards have become
a more convenient substitute for travelers checks.
Money Order
A money order is a form of a prepaid check. You can buy it at a financial
institution or a post office, but you do not need to have an account
there. Money orders are a convenient replacement for cash. Because
you should not mail cash, you can purchase and mail a money order,
which never expires. The limit on one money order is $1,000. The post
office allows you to purchase up to $3,000 in money orders per day
without a picture ID and charges a small fee for them.
Personal checks
Trav Check
