Definition of cheque and demand draft
Cheque and Demand Draft serve the same purpose – to transfer funds from one person to another – but the main difference between the two is that a check is drawn on an individual’s account, while a demand draft is drawn on the bank’s own account.
A cheque is a written order from a bank account holder to the bank, directing the bank to pay a specific amount of money to the payee or to the payee’s order. It is a negotiable instrument that is used to make payments.
A demand draft is a type of check that is guaranteed by the issuing bank. It is a payment order, similar to a cheque, but unlike a cheque, the funds are guaranteed to be available at the time the demand draft is presented for payment. The bank issuing the demand draft assumes the responsibility for the payment and not the account holder. Demand drafts are typically used for large or important transactions, such as the purchase of a house or car.
Purpose of cheque and demand draft
The main purpose of a cheque is to facilitate the transfer of funds from one bank account to another. A cheque can be used to make payments to individuals or businesses, and can be written by the account holder in favor of themselves or a third party. Cheques provide a convenient and widely accepted method for making payments, and are commonly used for personal and business transactions.
The main purpose of a demand draft is to provide a guaranteed method of payment for large or important transactions. A demand draft is guaranteed by the issuing bank, meaning that the funds will be available at the time the demand draft is presented for payment. This added security makes demand drafts an attractive option for transactions that involve a high degree of trust, such as real estate transactions or the purchase of high-value items. Demand drafts are also used by businesses and government agencies to make payments to other businesses or organizations.
Differences between cheque and demand draft
There are several key differences between a cheque and a demand draft:
Issuance: A cheque is issued by a bank account holder, while a demand draft is issued by a bank. A cheque can be issued in favor of self or third-party, while a demand draft is only issued in favor of third-party.
Payment: A cheque can be paid by presenting it to the bank, while a demand draft can be paid by presenting it to the bank or by depositing it into a bank account.
Security: Cheques are considered less secure than demand drafts because they can be lost or stolen, while demand drafts are considered more secure because they are paid only to the person whose name is on the draft.
Cost: Cheques are generally cheaper than demand drafts. Demand drafts usually have an additional fee for the guarantee of funds.
Time: Cheque typically takes a few days to clear, while demand drafts are cleared immediately when deposited into the account.
Return: If a cheque is returned, the account holder is informed, while demand drafts are guaranteed by the bank, so they can’t be returned.
Traceability: Cheques can be tracked and traced easily, while demand drafts are not as easily traceable.
Cancellation: Cheques can be cancelled by the account holder if they are lost or stolen, while demand drafts can’t be cancelled once issued.
Conclusion
A cheque and a demand draft are both financial instruments that can be used to make payments. However, there are several key differences between the two. Cheques are issued by bank account holders, while demand drafts are issued by banks. Cheques are considered less secure than demand drafts because they can be lost or stolen, and are generally cheaper than demand drafts. Demand drafts, on the other hand, provide a guaranteed method of payment for large or important transactions and are usually considered more secure. It is important to consider these differences when choosing between a cheque and a demand draft for a specific transaction. In general, cheques are more commonly used for personal and business transactions while demand drafts are used for large or important transactions that require a guarantee of funds.
