Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: The Cash Book: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 Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.