In business there are several payments made in a single day and it is not possible to make use of cash all the time. So to eliminate the risk of carrying cash for making or receiving payments of goods & services businesses prefer to use negotiable instruments. A Negotiable Instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. In this article we will talk about cheques and promissory notes that are two of these negotiable instruments. Though serving similar purposes, there are many differences between a cheque and a promissory note.
Cheque is a negotiable instrument in writing which instruct a financial institution to pay a specific amount of money from a specific demand account held in the depositor’s name with that institution. In other words Cheque is a simple payment instrument that people use to transfer currency from one account to another. It is considered to be the most convenient mode of payment that obliterates the need of cash in any business.
Here for an example, In businesses, if a businessman issues a cheque to a supplier for Rs 50,000 and supplier deposits the same in his bank account. First bank will validate the cheque and then transfer money from businessman’s account to supplier’s account. Which means supplier’s account will be credited(+) by Rs 50,000 and businessman’s account will be debited(-) by the same amount.
Promissory Note is a written dated and signed two-party document in which a borrower agrees (promises) to pay back money to a lender according to specified terms. A written promise to pay a certain sum of money, at a future time, unconditionally.
To understand promissory note, let us take an example. If you have taken a loan of Rs.5000 from your business partner Rohit, you can assure him of safety of his money by issuing a document saying that you will pay the money to Rohit or the bearer of the document after a date that is mentioned on the document. This document, duly signed by you and having a stamp affixed on it becomes a promissory note as it contains a promise made by you to Rohit that you will return the money after a specified period of time.
Difference Between Cheque And Promissory Note
- Promissory Note is a written promise made by one person to pay certain sum of money due to another person or any other legal holder of the document. Whereas A cheque is an unconditional order, in writing addressed by a customer, with signature, to the bank requiring it to pay on demand a certain sum of money to the order of a specified person or to the bearer.
- There are two parties in the promissory note – the Maker and the Payee. Whereas in case of cheque, there are three parties – the drawer, drawee and payee.
- In case of Promissory Note, acceptance is not necessary but in case of cheque, acceptance is required before it is presented for payment
- Promissory note can never be conditional but cheque can be conditional
- The maker of Promissory Note cannot pay to himself but in case of cheque, drawer can be payee.
- While a cheque is a one time payment, a promissory note is a promise made to pay back a loan; either in installments or in one go at a later date.
- Cheque is drawn on a bank whereas promissory note can be made by any individual in favour of another person.