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').