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i. Cheque
A cheque is a written order made by an account
holder to a specified banker to pay a certain sum of
money to the person ordered or the bearer of the
instrument. Since the payment of cash is not safe
and reliable, the cash dealings are made through
banks in the form of cheques. Commonly cheque is
used for the payment of internal trade. But in these Cheque
days, foreign payments can also be made through
banks as they can deal with the converted foreign currency services.

Key Point Cheque is an order slip issued by account holder to specified banker to pay
a certain sum of money to the particular person or bearer of the instrument.

ii. Bank Draft
It is a written order issued by a bank in the name of another bank for making the
payment of a certain amount to the specified person. This is a common and more reliable
means of remitting money through a bank. In this method, a person sending money
requests his banker along with the amount to be remitted, for issuing an order to a certain
bank of the receiver’s place for the payment of that certain amount. After getting the money,
the bank issues an order to the person requesting the bank. Then the person dispatches
the order to the seller through the most reliable medium, mostly through post offices by
registering or insuring it. When the seller gets that order, he goes to the concerned bank
and collects the money in his account. If the specified person does not get the order, the
money in the bank remains safe and the payment cannot be made to anybody else. In this
way, it is a more reliable instrument of payment in both types of trade.

Key Point Bank draft is written order issued by a bank in the name of another bank for
making the payment of a certain amount to the specified person.

iii. Letter of Credit (LC)
A letter of credit is a kind of guarantee given by
the importer’s bank to the foreign exporter for the
remittance of the value of trade after getting the goods
imported. This guarantee is given before the dispatch
of goods because the exporters dispatch the goods only
against the LC of a reputed bank. It is used mostly in
foreign trade. Under this method, the importer requests
his banker along with the necessary documents and the
marginal money in the local currency, to provide him
a bank guarantee for the payment to the trade value.
After the verification of all the documents, the bank
opens LC in the name of the local importer and provides
LC number to him. When the importer obtains the LC
Cheque

52 Aakar’s Office Practice and Accountancy - 10 Trade 53