Quick Answer
A negotiable check is a written, signed order directing a bank to pay a fixed amount on demand to a named payee or bearer. Firms issue checks through controlled, traceable procedures and maintain check blotters. They must avoid check kiting, unauthorized alterations, and extended delays in processing checks or account transfers.
Check handling combines basic payment terminology with operational controls. The firm needs to know who directs payment, who pays, who receives it, and whether every issued check can be traced.
Negotiable Checks and Their Parties
- Negotiable check: A written and signed order directing a bank to pay a fixed amount of money on demand to a named payee or bearer.
| Party | Role |
|---|---|
| Drawer | Writes the check. |
| Drawee | Bank directed to pay the check. |
| Payee | Receives payment. |
Memory Aid:
Picture the check on a three-stop trip: the drawer draws it, the drawee bank pays it, and the payee gets paid.
Exam Tip: Gotchas
- The drawee is the bank directed to pay, not the person receiving payment. The payee receives payment.
Controlled Issuance and Records
- Controlled check issuance: Issue checks under firm procedures so each payment is authorized and traceable.
- Check blotter: A record of issued checks used for tracking and reconciliation.
Authorized issuance -> check blotter record -> tracking and reconciliation.
Exam Tip: Gotchas
- A check blotter supports both tracking and reconciliation. It is the record of issued checks, not merely a record of checks awaiting payment.
Prohibited Practices
- Check kiting: Improper use of timing differences between financial institutions to create the appearance of available funds.
- Altering checks: Changing a check after issuance without proper authorization.
- Extended check holds: Retaining checks without processing for an extended period.
- Extended transfer holds: Failing to process, or holding, account transfers for an extended period.
Exam Tip: Gotchas
- Check kiting relies on timing differences to create the appearance of available funds. It does not create actual available funds.
- Extended delays are prohibited for both checks and account transfers.