Business often make use of Overdrafts. Image credit

Business often make use of Overdrafts. Image credit

ZIMSEC O Level Principles of Accounts 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 Principles of Accounts Notes.

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