A credit facility where a bank allows a business to withdraw more than its account balance up to an agreed limit, charging interest only on the amount overdrawn.
A Bank Overdraft (OD) is a short-term revolving credit facility linked to a current account. The bank sets a sanctioned limit based on business turnover, collateral, or credit score. The borrower can draw and repay any number of times within the limit. Interest is charged daily on the outstanding balance, making it cheaper than a term loan for fluctuating needs. ODs appear as current liabilities on the balance sheet. They're ideal for managing working capital gaps, seasonal fluctuations, and unexpected expenses. Types include clean OD (unsecured), secured OD (against FD, property, or stock), and cash credit (against inventory/receivables).
Sanctioned OD limit: ₹10,00,000 at 12% p.a. On April 1, business draws ₹5,00,000. Interest for that day: (₹5,00,000 × 12%) ÷ 365 = ₹164. On April 5, repays ₹3,00,000. New daily interest: (₹2,00,000 × 12%) ÷ 365 = ₹66.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Both are revolving credit facilities. Overdraft is granted against the borrower's general creditworthiness or fixed assets (FD, property). Cash Credit is specifically secured against inventory and receivables, with periodic stock audits. Cash credit limits are tied to stock/debtor levels.
It appears as a current liability on the balance sheet. Under Ind AS 7, bank overdrafts repayable on demand that form part of cash management are included in cash and cash equivalents for the cash flow statement.
A periodic document issued by a bank summarizing all transactions (deposits, withdrawals, fees, interest) in an account over a specific period.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
Debts and obligations a business must pay within one year, including accounts payable, short-term loans, accrued expenses, and taxes owed.
Interest calculated on both the initial principal and the accumulated interest from previous periods — 'interest on interest'.
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