Overdraft

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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