A check is a negotiable instrument that directs a bank or financial institution to pay a specified amount of money from the check writer’s account to the person or entity named on the check (the payee) upon demand.
Key Characteristics
Drawer
The drawer is the person or entity who writes and signs the check. They must have a checking account with a financial institution.
Payee
The payee is the person or entity to whom the check is made payable.
Drawee
The drawee is the financial institution or bank where the drawer’s account is held. The drawee is responsible for verifying that the drawer has enough funds to cover the check amount.
Amount
The specified amount must be written in both numerical and textual forms to reduce the risk of alteration.
Date
The check must be dated, indicating when it was written.
Signature
The drawer’s signature authorizes the bank to release funds. Without a valid signature, the check is invalid.
Types of Checks
Demand Check
A demand check is payable upon presentation at the drawee bank without any specific date stipulated for payment.
Cashier’s Check
A cashier’s check is a check guaranteed by a bank, drawn on the bank’s own funds, and signed by a cashier. It provides a secure form of payment as the funds are immediately available.
Certified Check
A certified check is a personal check that the bank certifies as genuine and that there are sufficient funds in the account to cover it. The bank earmarks the necessary amount to ensure the check will be honored when it is presented.
Historical Context
The use of checks dates back several centuries. The concept can be traced as far back as the ancient Romans who used a form of checks to transfer resources. Modern checks evolved in banking systems particularly in the 17th-century England and quickly spread globally as a convenient, secure way to make payments.
Applicability
Checks are widely used for various types of financial transactions, including:
- Paying bills
- Making purchases
- Settling debts
- Transferring money between accounts
Related Terms
- Promissory Note: A financial instrument containing a written promise to pay a specified amount of money to a specified person at a specified time.
- Bank Draft: A check drawn by a bank on its own funds in another financial institution.
- Electronic Funds Transfer (EFT): The electronic movement of money from one bank account to another.
FAQs
What happens if a check bounces?
Are checks still widely used?
References
- Smith, J. (2020). Introduction to Banking. Finance Press.
- Brown, A. (2018). Negotiable Instruments Law. Legal Publishing.
Summary
In summary, a check is a vital financial instrument used for the transfer of money in a secure and documented manner. Understanding the components and functions of different types of checks helps in their effective and proper use, thus ensuring smooth financial transactions.
This comprehensive entry on checks serves as a solid resource for readers interested in understanding the form, function, and importance of checks in the financial system.
