The bank credited its account and returns the cheque to your bank through the clearing system. When your bank receives the cheque, it debits your account and your cheque is cleared. Your bank stampes the cheque as Cancelled and return it to you along with the monthly bank statement, hence the name Cancelled cheque.

I believe this is now done electronically. The clearing process is much quicker, and your bank won't wait until it physically receives the cheque before it debits your account. The bank we are using does not send us the cancelled cheque any more. However, the monthly online bank statement is attached with the images of all the cheques cashed or cancelled in the month.