How a bank overdraft is shown in the accounts

Most students meet the bank as a positive number: money the business has in its account. So it can be a surprise when the same account appears on the statement of financial position under liabilities, as something the business owes.

Nothing strange has happened. A bank account can point in two directions, and an overdraft is what we call it when it points the other way.

One account, two directions

The business’s bank account, recorded in the cash book, is a running record of money in and out. Receipts increase it and payments reduce it. The balance is whatever is left, and it can land on either side of zero.

When more has come in than gone out, the business has funds at the bank. When more has gone out than came in, the business has used the bank’s money. This happens because the bank let payments continue after the account ran dry.

What a debit balance is telling you

In the cash book, receipts go on the debit side and payments on the credit side. When receipts exceed payments, the account has a debit balance. This is the ordinary case: the business owns money held at the bank.

That is why a positive bank balance is an asset. It is as liquid as cash in a till. A debit balance of RM4,000 is RM4,000 the business has.

When the balance flips to a credit

Suppose payments run ahead of receipts. Starting from a nil balance, the business pays out RM11,000 in a month but only RM9,000 comes in, and the bank honours the payments anyway. The credit side is now larger, and the account shows a credit balance of RM2,000.

A credit balance at the bank is an overdraft. The business has spent money it did not have and now owes the RM2,000 back. The same account that usually records an asset now records an amount owed.

Why an overdraft is a liability, not a negative asset

It is tempting to see an overdraft as negative cash. Accounting does not treat it that way.

An asset is something the business owns or controls. A liability is something it owes to someone else. An overdrawn account is money owed to the bank, so it is a liability in its own right.

The bank is a creditor, like a supplier who delivered goods on credit. Showing it under liabilities shows that claim plainly, rather than hiding it as a negative figure among the assets.

Where it appears on the statement of financial position

A bank overdraft is a current liability. It sits with trade payables and other short-term obligations. The bank can normally ask for repayment at short notice, and the business expects to clear it soon.

A debit balance at the bank is a current asset, grouped with inventory and trade receivables. So the same account can appear among current assets or among current liabilities, depending on the direction of its balance.

The same figure, seen from the bank’s side

When the business has funds at the bank, the bank owes that money to the business. From the bank’s view, the customer is a creditor. When the business is overdrawn, it is the reverse.

The cash book and the bank statement are two records of one relationship, kept from opposite sides. A credit balance in the business’s cash book matches the business being a debtor of the bank. The two records are meant to be opposites, not copies.

Why cash and an overdraft are not netted off

A business might hold RM3,000 in a deposit account and be RM2,000 overdrawn on its current account. It is tempting to net these to a RM1,000 asset. The accounts generally keep them apart.

The RM3,000 is a resource the business owns. The RM2,000 is an amount it owes.

Showing both tells the reader the business carries a debt even while holding funds elsewhere. Accounting avoids cancelling assets against liabilities without good reason.

What an overdraft says about the business

An overdraft is a current liability repayable on demand, so it affects how short-term health is read. When current liabilities are compared with current assets, an overdraft adds to the near-term claims.

A modest overdraft may be a normal working tool. A large or persistent one may show that the business leans heavily on the bank to keep trading.

The direction of the bank balance tells the reader whether the business is keeping money at the bank or using the bank’s money to trade.

If one account moving between asset and liability still feels slippery, one of our teachers can work through cash-book examples with your child. They show the balance crossing from debit to credit and landing in the right place on the statement. Book a trial class to see it.

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 2.3 Books of prime entry (page 12).