What it means
Par means face value, so an item paid at par is paid for exactly the amount shown on it. A nonpar item is one where the paying bank, known as the drawee bank, sends back less than the full amount.
The difference is an exchange charge or remittance fee, which pays for the cost of handling and returning the money. Historically, some small banks in certain countries refused to settle cheques at par when they came through the collection system.
Because the bank collecting the cheque for a customer would then receive less than face value, it either passed the deduction on to its customer or absorbed it. Over time, regulation and the growth of electronic clearing pushed most banks to accept items at par.
For a business, the significance is practical. If a customer pays by a cheque drawn on a nonpar bank, the receipts may not match the invoice, leaving small unexplained differences in the accounts.
Finance staff then need to chase the shortfall or write it off, and the cost of doing so can exceed the amount involved. The term also appears in discussions of payment systems and clearing, where the idea of par settlement is central to a reliable payments network.
When every item is settled at full value, businesses can trust that a $5,000 payment is worth $5,000. Today, most business payments are made electronically, so you will rarely meet the problem.
If you receive cheques from unfamiliar or overseas banks, though, it is worth asking your own bank how it treats items that may be collected at a discount. Bank reconciliation is where the problem usually shows up.
The bank statement shows a deposit slightly smaller than the cheque listed in the cash book, and the difference has to be explained before the books can be closed. A short standing note on how such differences are coded keeps month-end work moving.
In practice
Real-world examples.
Example
A distributor receives a $5,000 cheque from a small customer whose bank deducts an exchange charge. The deposit arrives at $4,987.50, and the accounts team records a $12.50 bank charge. The team asks the customer to pay by transfer in future.
Example
A school bursar collects fees by cheque from parents using many different banks. One cheque for $800 is credited at slightly less than face value. The bursar notes that the shortfall is too small to chase, but adds a line on the fee form encouraging electronic payments.
Example
A regional wholesaler receiving payments from remote branches finds that a handful of items are settled at a discount. Finance quantifies the monthly cost at $60 and compares it with the cost of changing the payment method. It decides to require bank transfers from those branches.
Formula
Calculation
Amount received = face value of item - exchange charge
Suppose a company receives a $5,000 cheque drawn on a bank that deducts an exchange charge of 0.25% of the face value. The charge = 5,000 x 0.25% = $12.50. The amount received = 5,000 - 12.50 = $4,987.50. The $12.50 difference has to be recorded as a bank charge, or recovered from the customer if the invoice terms require payment of the full amount.Case study
Seen in the real world.
Greywell Seed Merchants is a fictional agricultural supplier created for this illustration. Many of its farm customers paid by cheque drawn on small local banks, and the accounts team noticed a steady trickle of tiny shortfalls between invoices and deposits.
Investigation showed that a few of the drawee banks were deducting a small charge on each item. Across a year, the total came to about $1,800, and the staff time spent reconciling the differences cost more than that.
The illustrative outcome was that the company offered a small early-payment discount for bank transfer and stopped accepting cheques from the affected banks. The shortfalls disappeared, and the reconciliations became much simpler.
Watch out
Common mistakes.
- Assuming every cheque is always paid at face value, when the paying bank may deduct a charge.
- Writing off small shortfalls without finding the cause, which hides a pattern that could be fixed.
- Confusing a nonpar item with a bounced cheque, when the item is paid but for a slightly lower amount.
Questions
People also ask.
What does par mean in this context?
Par means the full face value written on the item, so par payment means the recipient gets the whole amount.
Are nonpar items common today?
In most developed payment systems they are rare, because electronic clearing and regulation have pushed settlement at par.
Who bears the cost?
It depends on the arrangements, since the deposit bank may pass the deduction to its customer, or the payer may be asked to make up the difference.
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