Cancelled Check

What Is a Canceled Check?

A canceled check is a check that has been paid or cleared by the bank it was drawn on after it has been deposited or cashed. The check is “canceled” after it’s been used or paid so that the check cannot be used again.

Somebody who has written a check may also cancel it before it has been deposited or chased by alerting the issuing bank, thus voiding the check.

A cancelled check is a check payment for which the stated amount of cash has been removed from the payer’s checking account. Once the cash draw down is completed, the bank stamps the check as cancelled. Once a check is cancelled it can no longer be used as an authorization to remove additional funds from the account of the payer. A cancelled check has passed through the entire set of payment activities, which include the following:

  • Received by the payee
  • Endorsed by the payee
  • Deposited with the payee’s bank
  • Paid by the drawee bank to the payee bank
  • Cash is paid into the payee’s account by the payee bank

A payer can verify whether the checks it has issued have been classified as cancelled by accessing the on-line check record posted by the payer’s bank. This information is most commonly used as part of the bank reconciliation process, but can also be used to prove to a payee that a check payment was made, and that the check was cashed.

Less commonly, the bank instead mails all cancelled checks back to the payer along with the monthly bank statement. If so, the payer typically stores the checks as evidence of payment, and eventually shreds them once the company-mandated retention period has passed. A variation on the concept is for the bank to print check images in reduced size on the back of the bank statement, or on accompanying pages.

What Does a Cancelled Check Mean?

Back in the old days before modern computer systems, bank actually mailed cancelled checks back to you every month with your bank statement. Now banks don’t do that because of the shipping and processing costs. Instead, banks usually print copies of the canceled checks on the back of each bank statement.

A canceled check has been paid after going through a check clearing process. The check is canceled once the money has been drawn from the bank the check was written on or the drawee. The payee is the person the check is written to, and the payee’s bank receives the deposit. The process of a canceled check includes the following:

  • The payee, or the person the check is written to, signs the back of the check.
  • The check is deposited into the payee’s bank account.
  • The payee’s bank notifies the drawee’s bank, and the transaction goes through the system of the Federal Reserve Bank.
  • The drawee’s bank (or the bank the check was written from) pays the payee’s bank the funds if there are sufficient funds in the payor’s account.
  • The payee’s bank deposits the cash or makes the funds in the deposit “available” for withdrawal.

Today, nearly all checks are cleared through the Federal Reserve Banking system electronically even in cases when the deposit is a paper check. The deposit and check clearing process is still performed, but the paper check almost never leaves the facility where it is deposited.

Instead, a special scanner creates a digital impression of the front and back of the check, which it sends to the other bank. When the check finally clears the account of the payor or the person who wrote it, it’s considered canceled. In short, a canceled check means the clearing process has finished, and the check cannot be reused. As a result, canceled checks can be used as proof of payment.

Example

Everyone is familiar with checks. They are documents or contracts between the bank and a depositor that are signed by the depositor and instruct the bank to pay another third party the depositor’s money. It’s a mouthful, but it’s a pretty simple concept. When you deposit money in a checking account, the bank holds the money on account for you. Writing a check simply notifies the bank to take money out of your account and give it to the recipient on the check.

It is still possible to get physical copies of your cancelled checks by calling your bank and working it out with them. Most companies keep a copy of their cancelled checks on file if they aren’t printed on the companies’ bank statements. These physical cancelled checks provide proof of payment and evidence of expenses.

Canceled Check Fees

While canceled checks themselves do not come with any fees, you can run into fees when you order copies of them from your bank. For example, Bank of America doesn’t charge for the first two check copies of each request, but then it charges $3 for each copy up to $75 per request. These fees vary by institution and can often be avoided by viewing and printing canceled checks online.

Canceled Checks vs. Returned Checks

Returned checks are checks that are not processed because the issuing bank does not pay them. This can happen for a variety of reasons, such as insufficient funds or a missing signature. If your check gets returned, you’ll often have to pay a fee.

Canceled checks are ones in which the money is deducted from the checking account and processed successfully. They are marked canceled by the bank so that they are not processed again.

Canceled Checks vs. Stop Payment Requests

If you have written a check but want to halt its processing, you can issue a stop payment request. After doing so, the check will be flagged so that if someone tries to cash it, it will be denied. You may need to order a stop payment if, for example, you lost the check before sending it. This is different from a canceled check, which is marked “canceled” upon completion to prevent duplication.

When Would You Need a Cancelled Cheque?

You may have to submit a cancelled cheque in the following cases:

  • Mutual Funds: If you are investing in mutual funds or the stock market, you must open a Demat account. The company would want you to submit a cancelled cheque to open the account to verify if the bank account associated with the investment is yours in reality. The requirement of the cancelled cheque is in accordance with the Know Your Customer (KYC) guidelines.
  • EMI: Equated Monthly Instalments (EMI) is the most sought after method of payment when you are buying a gadget or a high-value item. Individuals pay monthly instalments even in the case of loans such as car loan, home loan, education loan, and personal loan. To initiate the process of monthly instalments, you must submit a cancelled cheque as proof of having a bank account.
  • Electronic Clearance Service: An electronic clearance service automatically deducts money from your account every month for any transaction you have done. In this case, you must set up the electronic clearance service.
  • Provident Fund Withdrawal: Companies generally ask for a cancelled cheque when you want to withdraw your EPF money.
  • Insurance Policy: A cancelled cheque is required even when you are purchasing an insurance policy.

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