Every business firm maintains the current account with some bank. When the business firm withdraws the amount from a bank more than its balance lying in its account, the extra amount withdrawn will be called as bank overdraft. Bank overdraft is sort of loan, being given by the banks to its clients. It is sanctioned by the banks to its clients to meet their day to day demands. The overdraft never remains constant or fixed but it increase or decreases after every transaction in respect of bank account.
The overdraft is sanctioned by the bank on the basis of some security. Fixed assets, fixed deposits or stock are treated as good securities for overdraft purpose. Some time the overdraft can be sanctioned on the basis of goodwill of the business firm. In this case, no security is required. But this type of overdraft is sanctioned only for a short period. Bank overdraft is known as cash credit also. Interest is charged by the banks on debit balance only for the period of loan only. So, this is very much beneficial to the business firm because whenever the firm has surplus money, it need not to pay the interest. In case of fixed loans, one has to pay the interest on the loan amount irrespective of the bank balance.
Being a loan, bank overdraft is shown in liabilities side of the balance sheet. Again, if the overdraft is against any security then it will be shown as secured loan and if no security is furnished for overdraft then it will be shown as unsecured loan.
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