Bank Overdraft
What Does Bank Overdraft Mean?
A bank overdraft is when the bank account has a negative balance.
![bod1](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod1.jpg)
How it Works
A business will receive cash from sales and customers payments etc.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod2.jpg)
The business will deposit this money in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod3.jpg)
The business will also make cash payments.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod4.jpg)
Here, the business withdraws money from the bank to pay for expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod5.jpg)
Most of the time, the business will receive more money than it pays out.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod6.jpg)
This results in a positive balance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod7.jpg)
In other words, there are sufficient funds in the checking account to cover expenses and other payments.
![bod8](https://seeaccountingnow.online/wp-content/uploads/2021/06/bod8.jpg)
Sometimes, though, a business will acquire a large asset.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod9.jpg)
Or customers may be slow paying what they owe.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod10.jpg)
Such things can result in outgoings being more than incomings.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod11.jpg)
This means withdrawals will be greater than deposits.
![bod12](https://seeaccountingnow.online/wp-content/uploads/2021/06/bod12.jpg)
The shortfall will result in a negative bank balance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod13.jpg)
This is known as being overdrawn.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod14.jpg)
In other words, the business has insufficient funds in the bank to cover withdrawals.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod15.jpg)
To cover the shortfall, the bank usually offers an overdraft.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod16.jpg)
This is like a temporary loan.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/bod17.jpg)
© R.J. Hickman 2020