Definition
The term “Not Negotiable” refers to the status of a bill of exchange, indicating that it ceases to be a negotiable instrument. This means that while the instrument can still be transferred, any subsequent holder cannot obtain a better title than the person from whom it was received. This notation is often a safeguard in case the instrument is stolen or fraudulently transferred.
In practice, a cheque can be marked as “Not Negotiable” by crossing it with these words. For other forms of financial instruments like promissory notes or drafts, the term must be inscribed directly on their faces to enforce the same precautionary measures.
Examples
- Cheque: A business issues a cheque to a vendor with the words “Not Negotiable” crossed on it. The cheque can still be endorsed by the vendor, but any further holder cannot claim better rights to it in the event it was stolen or obtained by fraud from the vendor.
- Promissory Note: A borrower issues a promissory note marked “Not Negotiable.” If a lender sells this note to another party, the subsequent holder cannot claim more rights than the original lender, especially if the note was transferred illicitly.
Frequently Asked Questions (FAQs)
Q1: What happens if a negotiable instrument is marked as ‘Not Negotiable’?
A1: When a negotiable instrument is marked as “Not Negotiable,” it can still be transferred, but any subsequent holder cannot obtain a better title than the original holder. This acts as a safeguard in case the instrument is stolen or transferred fraudulently.
Q2: Can all forms of bills of exchange be marked as ‘Not Negotiable’?
A2: No, only cheques can be crossed ‘Not Negotiable.’ For other types of bills of exchange, the term must be inscribed directly on the face of the instrument.
Q3: How does marking a cheque as ‘Not Negotiable’ affect its cashability?
A3: Marking a cheque as ‘Not Negotiable’ does not affect its cashability. The cheque can still be cashed by the payee and any subsequent holders, but it provides a safeguard against the transfer of ownership in case of theft or fraud.
Q4: Can an instrument be both ‘Not Negotiable’ and ‘Account Payee Only’?
A4: Yes, a cheque can be marked as both ‘Not Negotiable’ and ‘Account Payee Only.’ This further restricts the handling of the cheque to only being deposited in the account of the stated payee, providing an additional level of security.
- Bill of Exchange: A written order binding one party to pay a fixed sum of money to another party at a predetermined future date or on demand.
- Negotiable Instrument: A document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.
- Cheque: A written order directing a bank to pay money as instructed from the customer’s account.
- Safeguard Clause: Provisions added to financial instruments to protect the holder from loss due to specific contingencies.
Online Resources
Suggested Books for Further Studies
- “Principles of Accounts” by David Cox - A comprehensive guide that covers various aspects of financial accounting, including negotiable instruments.
- “Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso - Discusses practical applications and decision-making tools in accounting.
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas - Provides detailed explanations on financial accounting subjects, including checks and other forms of negotiable instruments.
Accounting Basics: “Not Negotiable” Fundamentals Quiz
### What does the notation 'Not Negotiable' mean on a cheque?
- [ ] It can’t be used to withdraw funds.
- [ ] It has no legal significance.
- [x] It ceases to be a negotiable instrument.
- [ ] It has expired.
> **Explanation:** When a cheque is marked 'Not Negotiable,' it ceases to be a negotiable instrument. This means while it can still be transferred, subsequent holders won’t get a better title than the person from whom they received it.
### Can any bill of exchange be marked 'Not Negotiable'?
- [ ] Yes, any bill of exchange can be marked 'Not Negotiable.'
- [x] No, only cheques can be crossed 'Not Negotiable,' other forms must have it inscribed.
- [ ] Only promissory notes can be marked ‘Not Negotiable.’
- [ ] Any negotiable instrument can have 'Not Negotiable' inscribed.
> **Explanation:** Only cheques can be crossed 'Not Negotiable;' other forms of bills of exchange must have it inscribed directly on their faces.
### What protection does a 'Not Negotiable' cheque offer?
- [ ] It ensures faster processing.
- [x] It provides a safeguard if the cheque is stolen or transferred fraudulently.
- [ ] It increases the value of the cheque.
- [ ] It guarantees endorsement by the recipient’s bank.
> **Explanation:** A 'Not Negotiable' cheque provides a safeguard if the cheque is stolen or fraudulently transferred; subsequent holders cannot obtain a better title.
### Does marking a cheque as 'Not Negotiable' affect its cashability?
- [x] No, it does not affect its cashability.
- [ ] Yes, the cheque cannot be cashed.
- [ ] It delays the cashing process.
- [ ] It requires additional bank approvals to cash.
> **Explanation:** Marking a cheque as 'Not Negotiable' does not affect its ability to be cashed. It simply provides a safeguard against fraudulent transfers.
### Can a 'Not Negotiable' instrument be endorsed?
- [x] Yes, it can still be endorsed.
- [ ] No, it cannot be endorsed.
- [ ] Only by the original payee.
- [ ] Only with bank approval.
> **Explanation:** A 'Not Negotiable' instrument can still be endorsed, but subsequent holders cannot obtain a better title than the endorsement holder.
### How should a non-cheque bill of exchange be marked as 'Not Negotiable'?
- [ ] By crossing it with words.
- [x] By inscribing 'Not Negotiable' on its face.
- [ ] By adding a stamp on the back.
- [ ] By including a note attached to it.
> **Explanation:** Non-cheque bills of exchange must have 'Not Negotiable' inscribed on their faces to render them non-negotiable.
### What is the effect of 'Not Negotiable' on the holder's title?
- [x] The holder cannot obtain a better title than previous holders.
- [ ] The holder’s title becomes irrevocable.
- [ ] The title becomes immediately actionable in court.
- [ ] The title improves over time.
> **Explanation:** A 'Not Negotiable' marking means that the holder cannot obtain a better title than the person from whom they received it.
### Can a cheque be marked both 'Not Negotiable' and 'Account Payee Only'?
- [x] Yes, it can be marked with both notations.
- [ ] No, it has to be one or the other.
- [ ] Only banks can mark it with both.
- [ ] It is not recommended.
> **Explanation:** A cheque can indeed be marked both 'Not Negotiable' and 'Account Payee Only' to provide better security measures.
### What does 'Account Payee Only' signify on a cheque?
- [ ] The cheque can be cashed by anyone.
- [ ] The payee can deposit it into any account.
- [ ] The cheque cannot be cashed.
- [x] It must be deposited into the payee's account.
> **Explanation:** 'Account Payee Only' indicates that the cheque must be deposited into the payee’s bank account, offering another layer of security.
### What’s a crucial difference between 'Not Negotiable' and 'Account Payee Only' cheques?
- [ ] One affects cashability.
- [x] One provides title protection, the other mandates account deposit.
- [ ] One has legal power, the other doesn’t.
- [ ] One guarantees safety, the other doesn’t.
> **Explanation:** 'Not Negotiable' provides title protection, preventing the transfer of better title, while 'Account Payee Only' mandates that the cheque be deposited into the payee’s account.
