Glossary
Bank overdraft
A short-term facility that lets a business spend more than it has in its bank account.
What it means
A current liability arising when withdrawals exceed the balance in the bank account, up to an agreed limit.
Example
A bank balance of −RM800 is an overdraft, shown as a current liability.
Why it matters
It is a form of short-term borrowing and affects liquidity ratios.
In practice
On the statement of financial position a bank overdraft is a current liability, because it is money owed to the bank and is normally repayable on demand. In the ledger the bank account shows a credit balance, the mirror image of the debit balance when the account is in funds. Interest is charged only on the amount drawn and for the days it is outstanding. This makes it behave like a flexible short-term loan.
For example, a business ends the month with its bank account overdrawn by RM2,300. That RM2,300 appears as a current liability. Overdraft interest of, say, RM40 is an expense in the income statement.
Students often confuse an overdraft with a bank loan. A loan is drawn as a single lump sum, often shown as a non-current liability, with scheduled repayments. An overdraft goes up and down daily as receipts and payments pass through the same account.
If you are unsure where a negative bank balance belongs, one of our teachers can practise statement layouts with you. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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