Overdraft

1. Facility.

An overdraft facility is a line of credit which is applied to a current account and may be drawn on demand.

It is also known as a demand loan, as it is repayable to the bank on demand by the bank.

For this reason, it is risky to use overdrafts for core financing needs.

2. Financial reporting - balance sheet - liabilities.

The amount by which an account is overdrawn.

Also known as an overdraft balance.

Example: Overdraft

We have an overdraft of £50k at the start of April. In other words we owe £50k to the bank.

We need to put more money into our account.

Now we deposit £60k into the account during the month of April.

This repays our overdraft, with some cash left over.

At the end of April, our bank account now has a positive amount in it, of:

-50 + 60 = 10k

We now have £10k cash in our bank account at the end of April.

The situation of a positive amount in the bank is known as cash at bank (or being 'in credit').

See also