Difference between revisions of "Overdraft"

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(Expand to note use of overdrafts for medium-term financing.)
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A line of credit which is applied to a current account and may be drawn on demand.
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1. ''Facility''.
  
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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.
 
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.
 
For this reason, it is risky to use overdrafts for core financing needs.
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2. ''Financial reporting - balance sheet - liabilities.''
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The amount by which an account is overdrawn.
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Also known as an overdraft balance.
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:<span style="color:#4B0082">'''''Example: Overdraft'''''</span>
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:We have an overdraft of £50k at the start of April. In other words we owe £50k to the bank.
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:We need to put more money into our account.
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:Now we deposit £60k into the account during the month of April.
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:This repays our overdraft, with some cash left over.
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:At the end of April, our bank account now has a positive amount in it, of:
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::-50 + 60 = 10k
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:We now have £10k cash in our bank account at the end of April.
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:The situation of a positive amount in the bank is known as cash at bank (or being 'in credit').
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== See also ==
 
== See also ==
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* [[Balance]]
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* [[Balance sheet]]
 
* [[Bridge financing]]
 
* [[Bridge financing]]
 
* [[Concentrate]]
 
* [[Concentrate]]
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* [[Facility]]
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* [[Liabilities]]
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* [[Overdrawn]]
 
* [[Revolving credit facility]]
 
* [[Revolving credit facility]]
 
* [[Round tripping]]
 
* [[Round tripping]]
  
 
[[Category:Liquidity_management]]
 
[[Category:Liquidity_management]]

Latest revision as of 12:29, 29 October 2020

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