What is a Post Dated Cheque?

In banking parlance, the term “post-dated cheque” refers to a Cheque written by the payer (drawer) for a future date. In other words, it is a cheque written for a date well after the date on which it was written. In this case, the drawer should always maintain enough funds in the account so that the cheque doesn’t get dishonored/bounced on the specific date mentioned in the cheque.

How does Post Dated Cheque work?

The drawer issues a cheque that is written for a future date. So, there shouldn’t be any journal entries to record in the drawer’s books, i.e., there should be no reduction in cash until the specified date. Also, the recipient shouldn’t make any entry in their books, i.e., there shouldn’t be any increase in money until the selected date. So, the date mentioned in the cheque effectively postpones the recording of the underlying transaction. However, the transaction will be captured accordingly on the specified date, which means that the drawer will record a reduction in cash and payable. At the same time, the recipient will book an increase in cash and a decrease in receivables.

Examples of Post Dated Cheque

Let us look at the following examples to understand the concept.

Example #1

Let us assume that XYZ Inc. received a cheque for $1,000 from a customer for an unpaid invoice on 15^th December 2021. It was a post-dated cheque with a specified date of 15^th January 2022. So, XYZ Inc. couldn’t record the cash receipt for the financial year ending 31^st December 2021, nor could it reduce its associated accounts receivable in the books. Hence, the post-dated cheque did not impact XYZ Inc.’s financial statements for 31^st December 2021.

Example #2

Let us assume that ABC Inc. owes a supplier $5,000 for purchases made on 30^th April 2021, which was 31 days back. Since ABC Inc. doesn’t have adequate cash available to make the payment to the supplier, the company offers to provide two $2,500 cheques: one dated 15^th June 2021 and the other dated 15^th July 2021.

On 31^st May 2021, the supplier accepted the cheques and agreed to deposit them on the dates mentioned. On 15^th June 2021, the supplier deposited the first post-dated cheque and got the cash increased by $2,5000 while the accounts receivable were reduced by $2,500. A similar transaction was again recorded on 15^th July 2021 when the supplier deposited the second post-dated cheque.

Why issue a Post Dated Cheque?

Typically, a post-dated cheque is used when the drawer intends to postpone the payment to the recipient. In contrast, the recipient accepts such delayed payment because it represents a fixed date for the deposit, which eventually translates into revenue.

However, it is also used when the payer has to hand over many post-dated cheques to cover future payments. The recipient agrees to such a payment arrangement because it improves the odds of being paid. In addition, it is used as a credit risk mitigation in case of installment payments.

Post Dated Cheque Validity

Like any other normal cheque, it also remains valid for three months from the date of issuance. Please note that the 3-month validity is not counted in terms of the number of days; rather, it depends on the date of issuance. For instance, if this cheque is issued on 15^th January 2021, it will be valid till 14^th March 2021, irrespective of the number of days between the two dates.

Rules for Post Dated Cheque

There are some rules associated with post-dated cheques, which are mentioned below.

• Fraud is Not Allowed: It is considered illegal if a drawer issues a post-dated cheque while they don’t have adequate funds to pay off the amount mentioned in the cheque on the specified date.
• Not a Written Agreement: In countries like US and UK, the payee can deposit the cheque at any point in time before the specified date unless and until the drawer mentions to the bank that the post-dated cheque can’t be encashed before the specified date. However, it is not applicable in countries like India and Australia, where banks can’t encash the cheque before the selected date.
• Communicate with the Bank: A future date mentioned in a cheque means or guarantees nothing. The drawer must provide written instructions to the bank stating exactly what has to be done and how to do it. Different banks have different rules regarding monitoring and preventing premature payments of these post-dated cheques.

Key Takeaways

Some of the key takeaways of the article are:

• It is a cheque issued by a drawer to a recipient to be encashed on a particular date in the future.
• Before the date mentioned in the cheque, there shouldn’t be any journal entry to record in the accounting books of both drawer and recipient.
• Like any ordinary cheques, post-dated cheques have a validity of 3 months from the date of issuance.
• It is considered illegal to issue a post-dated cheque without having enough funds in the account to cover the payment mentioned in the cheque.

Conclusion

So, it can be seen that post-dated cheques are employed as short-term credit or loans and expand businesses. It allows running business operations without stopping for lack of funds. Drawers also use it to avail products and services before paying for them upfront. Overall, it is a powerful financial instrument if used wisely and strategically.

Recommended Articles

This is a guide to Post Dated cheque. Here we also discuss the definition, working, examples, issues, validity, and rules for Post Dated cheques. You may also have a look at the following articles to learn more –

1. Banker’s Acceptance
2. Cash Receipts
3. Fidelity Bonds
4. Accounts Receivable Factoring

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