Bank Overdraft

Any amount withdrawn over and above the bank balance is called bank overdraft and is shown as a current liability in the statement of financial position. It is basically a borrowing facility on a bank account which is repayable on demand. As is the case with loans, interest on bank overdraft must be paid as well as an overdraft fee.

A bank overdraft is a flexible form of obtaining funds for a short period of time.  A company is only required to pay interest on the amount of the overdraft facility used.

For instance, if Myrcella has $400 in her bank account and she writes a check for $450 and the bank allows her to borrow the extra $50, this $50 will represent bank overdraft and will be credited in her Statement of Financial Position under the head current liabilities. A bank overdraft usually helps to fund temporary shortage of funds by covering short term gaps between incomes and expenditures.

 

 

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