Classification and Presentation of Bank Overdrafts

✦ Bank overdrafts represent negative balances in cash accounts when withdrawals exceed deposits.

✦ Under US GAAP (ASC 210), bank overdrafts are classified as liabilities unless certain offsetting conditions are met.

✦ Overdrafts typically must be shown separately from positive cash balances unless the right of offset exists with the same institution.

1. What Are Bank Overdrafts?

✦ A bank overdraft occurs when a company writes checks or makes payments exceeding its available bank balance.

✦ Overdrafts indicate that the account balance is negative and reflect amounts owed to the bank.

✦ They represent short-term financing arrangements unless clearly offsettable against positive balances.

2. US GAAP Classification Criteria (ASC 210-20)

✦ Under ASC 210-20, overdrafts must be reported as liabilities, typically as short-term borrowings or accounts payable.

✦ Exception exists if:

 • Overdrafts and cash balances are held at the same bank. • A formal right of offset exists. • Intent is to settle net or simultaneously.

✦ If these conditions are met, offsetting is allowed and reported as net cash.

3. Presentation on the Balance Sheet

✦ Without offsetting conditions:

 • Report bank overdrafts separately under current liabilities (usually as short-term borrowings). • Do not offset against positive cash balances.

Example:

Current liabilities:Bank overdraft – $10,000

✦ With offsetting conditions met:

 • Present as a net cash balance under current assets.

Example (with right of offset):

Cash and cash equivalents – $90,000 (net of $10,000 overdraft)

4. Journal Entry — Bank Overdraft Recording

✦ When an overdraft occurs:

Entry:

debit Accounts Payable (or Bank Overdraft Liability) – $10,000credit Cash – $10,000

5. Cash Flow Statement Treatment

✦ Under ASC 230, overdrafts must be included as financing activities, unless they qualify for netting.

✦ Overdrafts do not reduce cash equivalents directly on the cash flow statement unless offset conditions are explicitly met.

6. Disclosure Requirements

✦ Clearly disclose:

 • Amount and nature of overdrafts. • Terms and conditions, including interest rates and maturity. • Availability and terms of offset arrangements, if applicable. • Classification and presentation rationale.

7. IFRS Comparison (IAS 7)

Topic	US GAAP (ASC 210 / ASC 230)	IFRS (IAS 7)
Overdraft classification	Liabilities (unless offset allowed)	Liabilities (generally same)
Offset conditions	Right of offset explicitly required	Same (explicit right of offset)
Cash flow statement	Financing activity	Financing activity
Disclosure	Required	Required

8. Common Errors

✦ Offsetting overdrafts without formal right of offset or proper bank arrangement.

✦ Incorrectly presenting overdrafts as negative cash equivalents on the balance sheet.

✦ Omitting detailed disclosures about overdraft arrangements and terms.

✦ Misclassifying overdrafts within operating cash flows instead of financing activities.

✦ Failing to separate overdrafts clearly in financial statements, impacting liquidity analyses.