Once supporting documentation for a payment has been correctly authorised, it is ready for payment and the cheque must be drawn up.
The cheque must be correctly dated with todays date. A post-dated cheque is not strictly valid. Equally, a cheque that is dated more than six months previously will be regarded as stale by the bank and not valid.
The cheque should be prepared in the name of the correct payee. This means that it should be prepared using the full business name of the recipient to be paid.
When a cheque is prepared, not only must it be for the correct amount, but the monetary amount in numbers must agree with the amount stated in words.
If a cheque payment is for a single invoice or cheque requisition then it is a straightforward matter of copying down the correct amount onto the cheque. However, if the cheque payment is for a number of invoices, and possibly including credit notes to offset the amount due, then they must be correctly totalled in order to arrive at the correct amount for the cheque.
A business, Smith & Co, is about to pay one of its suppliers, Manning & Sons. The receivables ledger record of the amounts owed to Manning & Sons is given below:
| Date | Invoice number | Amount $ |
|---|---|---|
| 13 December | 105345 | 382.94 |
| 18 December | 105448 | 114.26 |
| 20 December | Credit Note 273 | 102.45 |
| 23 December | 106293 | 449.11 |
| 12 January | 106331 | 152.83 |
| 15 January | 106934 | 119.02 |
| 28 January | 107018 | 229.30 |
It is now 30 January 20X4 and Smith & Cos policy is to pay all invoices net of credit notes for the previous month.
Prepare the cheque that will be issued to Manning & Sons.
Cheque amount
| 13 December | 105345 | 382.94 |
| 18 December | 105448 | 114.26 |
| 20 December | Credit Note 273 | (102.45) |
| 23 December | 106293 | 449.11 |
| Total | 843.86 | |
When a cheque has been written it will be removed from the cheque book, signed by the authorised signatory (or signatories) and then sent out to the payee. In order to keep a record of the amount of the cheque payment the counterfoil of the cheque should be completed. The counterfoil of the cheque is the small perforated section that remains in the cheque book when the cheque is removed.
The details to be included on the counterfoil are:
The individual who signs a cheque is effectively the final person to authorise that payment. The supporting documentation may be authorised and the cheque correctly prepared but it is the cheque signatory who finally signs the cheque and turns it into a valid form of payment. This highlights the importance of the cheque signatory who should be a suitably responsible person within the business. Many businesses require two designated signatories for a valid cheque.
The formalities to prepare a valid cheque, along with reliance upon designated signatories to ensure that payments are for valid business reasons help to ensure that cheque payments are secure methods of payment.
Clearly, cheque books should be retained in a secure environment unlit they are required, and signed blank cheques should ever be issued.
Each business will determine its own system of cheque signatories but a typical example may be as follows:
| Amounts Up to $5,000 | One director |
| $5,001 to $10,000 | Two directors |
| $10,001 to $20,000 | One director plus the finance director |
| Over $20,000 | Managing director/Chief executive officer plus the finance director |
Suppose that the following cheques need to be signed as soon as possible:
| Cheque no. | Amount |
|---|---|
| (a) 11723 | $5,379.20 |
| (b) 11724 | $1,406.29 |
| (c) 11725 | $293.50 |
| (d) 11726 | $20,501.80 |
Given below are the authorised cheque signatories:
The cheque signatory limits are:
Who can sign each of these cheques?