Accounting for Book and Bank Overdrafts and their Cash Flow Presentation

Account balance and bank statement

Every business has one or more bank accounts. Various situations can take place about these accounts such as writing cheques that exceed the company’s bank account. How do you record such transaction on your statement of financial position and cash flow presentation?

Difference between the bank overdraft and the book overdraft

Bank overdraft takes place when your business has no sufficient funds in its bank account to fully cover the presented cheques, but the bank pays out the cheques. An overdraft results in a short term liability as your business will have to settle the obligation with the bank.

Book overdraft occurs when the business issues checks that exceed its bank account balance, but they have not yet been presented for clearance to the bank. Therefore, this becomes an overdraft of the corporation’s books.

Presentation of book and bank overdrafts in a statement of financial position

Bank overdrafts are perceived as company’s short-term liability to the bank and therefore, are indicated as current liabilities in the statement of financial position. For instance, if your business bank account has zero balance and the bank allows you to make a payment of $10,000 via cheque, then, this amount should be recorded as a short term liability in the statement of financial position.

All book overdraft result in negative balances on your business accounting records. Since book overdrafts represent cheques issues that exceed the funds in the bank accounts, you record as a separate current liability or as accounts payables. See our article Accounting: Cash Flow Forecasting Mistakes to Avoid to get an insight on how you can better forecast your cash flow.

Cash flow presentation of book and bank overdrafts

Note that there are two methods of preparing cash flow statements: direct and indirect method. Since most businesses use the indirect method, we will review it here. Note that a cash flow statement has three types of cash inflows: cash from investing activities, cash from financing activities, and cash from operating activities.

When you prepare a cash flow statement using the indirect method, the resulting balances (prior year end and current year-end), need to be compared to determine any discrepancy between them.

Bank overdrafts are short term loans and can be perceived as a form of financing. Therefore, the difference between the overdrafts balances between the two accounting periods should be recorded as cash inflows from financing activities.

On the other hand, you should report book overdraft difference between the two accounting periods as cash flow from operating activities these overdrafts represent re-instated accounts payables.

Cash flow statement gives you the real picture of your business financial status. Therefore, it should be prepared by an accounting firm to avoid getting the wrong picture of the company’s financial position. Note that in Singapore, there are so many accountants, but you need an expert in accounting. Why don’t you contact us to draw your cash flow presentation accurately?