Definition of cheque and bill of exchange
Cheque and Bill of Exchange are both financial instruments used for the transfer of funds from one party to another.
A cheque is a written document that directs a bank to pay a specific amount of money from the writer’s account to the person or entity named on the cheque. It is a common method of making payments and is used for both personal and business transactions.
A bill of exchange is a legal document that orders one party to pay a specific amount of money to another party at a later date. It is often used in international trade transactions as a way for a buyer to guarantee payment to a supplier. A bill of exchange is also known as a draft.
Cheque
A cheque is a written document that directs a bank to pay a specific amount of money from the writer’s account to the person or entity named on the cheque. Cheques are a common method of making payments and are used for both personal and business transactions.
When a person writes a cheque, they are essentially giving the bank an order to pay a certain amount of money to the named recipient. The recipient can then present the cheque to their bank, which will clear the funds from the writer’s account and deposit the money into the recipient’s account.
There are several types of cheques, including:
- Personal cheques: These are cheques written by individuals for personal transactions such as paying bills or making purchases.
- Bank cheques: These are cheques issued by a bank, often used for large transactions such as buying a car or a house.
- Cashier’s cheques: these are cheques issued by a bank, guaranteed by the bank’s funds instead of the account holder’s.
- Certified cheques: These are cheques that have been certified by a bank, guaranteeing that the funds will be available when the cheque is presented for payment.
There are advantages and disadvantages to using cheques. Some of the advantages include convenience, security, and widespread acceptance. However, cheques can be lost or stolen, and there is a risk of fraud. Additionally, cheques can take several days to clear, which can cause delays in transactions.
Bill of Exchange
A bill of exchange, also known as a draft, is a legal document that orders one party to pay a specific amount of money to another party at a later date. It is often used in international trade transactions as a way for a buyer to guarantee payment to a supplier.
When a bill of exchange is issued, the party that issues it, known as the drawer, is ordering the party that the bill is addressed to, known as the drawee, to pay a certain amount of money to the party named on the bill, known as the payee, on a specific date or on demand.
There are different types of bills of exchange:
- Trade bills: These are bills of exchange used to finance trade transactions between the buyer and the supplier.
- Accommodation bills: These are bills of exchange used as a form of short-term credit, where a person or entity will sign a bill of exchange as the drawer, but not as the actual party that is responsible for payment.
Using a bill of exchange has some advantages, it can provide a guarantee of payment for the supplier, it can be used as a form of short-term credit, and it can facilitate international trade transactions. However, it also has some disadvantages, such as the risk of non-payment, the cost of drawing and discounting bills, and the complexity of the process.
Difference Between Cheque and Bill of Exchange
A comparison of cheques and bills of exchange highlights the similarities and differences between the two methods of payment.
Differences:
- A cheque is typically used for personal and domestic transactions, while a bill of exchange is often used in international trade.
- A cheque is payable on demand, meaning it can be presented for payment as soon as it is written. A bill of exchange, on the other hand, typically has a fixed maturity date.
- A cheque is drawn on a bank, while a bill of exchange is drawn by one party on another party.
- A cheque is governed by the laws of negotiable instruments, while a bill of exchange is governed by the laws of contract.
- A cheque can only be drawn by an account holder, while a bill of exchange can be drawn by anyone
- A cheque is payable by the bank, where as a bill of exchange is payable by the drawee.
Similarities:
- Both are used as a method of payment
- Both require a payer and a payee
- Both require a specific amount of money to be paid
- Both can be dishonored (bounced) if there are insufficient funds in the account
In terms of usage, a cheque is generally used for personal and domestic transactions, while a bill of exchange is primarily used in international trade. Cheques are payable on demand, while bills of exchange typically have a fixed maturity date. Cheques are drawn on a bank, while bills of exchange are drawn by one party on another party. Cheques are governed by the laws of negotiable instruments, while bills of exchange are governed by the laws of contract. Cheques can only be drawn by an account holder, while bills of exchange can be drawn by anyone. Cheques are payable by the bank, whereas bills of exchange are payable by the drawee.
Conclusion
Cheques and bills of exchange are both methods of payment, but they have some key differences. A cheque is typically used for personal and domestic transactions, is payable on demand and is governed by the laws of negotiable instruments, whereas a bill of exchange is often used in international trade, has a fixed maturity date and is governed by the laws of contract.
Cheques offer convenience, security, and widespread acceptance, but they can also be lost or stolen, and there is a risk of fraud. On the other hand, bills of exchange can provide a guarantee of payment for the supplier, it can be used as a form of short-term credit, and it can facilitate international trade transactions, but also has some disadvantages, such as the risk of non-payment, the cost of drawing and discounting bills, and the complexity of the process.
It’s important to understand the similarities and differences between cheques and bills of exchange in order to make an informed decision when choosing the appropriate method of payment. Both have their own set of advantages and disadvantages, thus it’s essential to evaluate the specific needs and circumstances of the transaction before making a choice.
