Definition of Check Endorsement
A check endorsement is the signature placed on the back of a check by the payee to transfer ownership of the check to another party or to deposit it into a bank account. The endorsement is both a legal and an accounting instrument for transferring the right to the check’s value from its original holder to a new party, without issuing a new check.
Types of Check Endorsement
- Transfer endorsement: the payee signs in favor of another party, who becomes the new payee
- Restrictive (agency) endorsement: authorizes a bank or agent to collect the check’s value on behalf of the payee
- Pledge endorsement: used to pledge the check’s value as security for a debt or obligation
- Blank endorsement: the payee signs without naming a transferee, and the check then circulates as a bearer instrument
- Conditional endorsement: the signature is accompanied by a restriction such as “For deposit only in account no…” to reduce the risk of cashing by an unintended party
Accounting Importance of Check Endorsement
The endorsement determines who is legally entitled to receive the check’s value, and it is used to trace the chain of liability if the check is dishonored. When a check received from a customer is endorsed to settle a supplier obligation, the accounting entry closes the customer’s receivable and the supplier’s payable without any cash movement, while the endorser remains a guarantor of the value if the bank later refuses payment and the instrument becomes a bounced check.
Practical Example
A contracting firm receives a SAR 80,000 check from a customer. Instead of depositing it, the firm endorses it to its raw-materials supplier to settle an invoice of the same amount. The accountant debits Accounts Payable (supplier) SAR 80,000 and credits Accounts Receivable (customer) SAR 80,000 — no cash account is touched.
Saudi Context
Under Saudi commercial law, an endorsement on the back of a check makes the endorser jointly liable for its value if the drawer’s account proves insufficient. Issuing a check without sufficient balance carries criminal penalties, so businesses verify the credit standing of any party in the endorsement chain before accepting an endorsed check as payment.