Principles of accounts:Bank Overdrafts

• Bank overdrafts are a way for businesses to borrow money in the short term
• With bank overdrafts the business is allowed to withdraw and/or make payments that exceed the business’s bank balance
• For example a business has a balance of $200 in its bank account
• The business might have an agreement with the bank that allows the business to overdraw the account to say up to $1000
• The business can thus make a withdrawal $500
• Under normal circumstances the business’s account falls under Assets i.e. when the account has a debit balance in the business’s books
• When the business overdraws its account the bank account will now have a credit balance in the business’s books
• Under these circumstances the bank account becomes a current liability
• It will be shown under “Current Liabilities” in the Balance Sheet/Statement of Financial position
• Sometimes the words O/D or their equivalent are written next to the bank balance to show that it has negative balance.

To access more topics go to the Principles of Accounts Notes.