The terms **overdraft** and **overdrawn** are closely related in banking, but they refer to different aspects of the same financial situation. Let鈥檚 break down the difference:
### 1. **Overdraft**:
– **Definition**: An **overdraft** is a banking service or arrangement where a bank allows an account holder to withdraw more money than is actually available in their account, up to a certain limit. Essentially, the bank extends a short-term loan to the account holder to cover transactions when the balance becomes negative.
– **Key Characteristics**: – **Pre-arranged facility**: The bank and account holder agree on an overdraft limit beforehand. – **Limit**: There is typically a maximum limit (e.g., $2,000), beyond which the account holder cannot withdraw. – **Interest/Fees**: Banks usually charge interest or fees on the overdrawn amount until it is repaid.
– **Example**: If you have an overdraft limit of $1,000 and your account balance is $0, you can still make a payment of $500 because the bank will cover it through the overdraft.
### 2. **Overdrawn**:
– **Definition**: **Overdrawn** refers to the state of your bank account when you have withdrawn more money than is available, causing your balance to fall below zero. When an account is overdrawn, it means you have used the overdraft facility (if available) or have gone into a negative balance without permission.
– **Key Characteristics**: – **Account status**: It describes the current condition of your account balance (negative or below zero). – **Potential Fees**: If you overdraw without having an overdraft agreement, the bank might charge overdraft fees or refuse the transaction (non-sufficient funds or NSF).
– **Example**: If you have $100 in your account and you make a purchase of $150, your account becomes overdrawn by $50.
### Key Differences:
| **Aspect** | **Overdraft** | **Overdrawn** | |————————–|———————————————|—————————————–| | **Nature** | A facility or service offered by the bank | The state of your bank account | | **What it Refers To** | An agreement that allows you to withdraw more than your balance (up to a limit) | The condition of your account being below zero (negative balance) | | **Loan or Balance** | Overdraft is a form of short-term loan | Overdrawn means your balance is negative | | **Fees/Interest** | Banks usually charge interest/fees on overdrafts | May lead to overdraft fees if unauthorized | | **Example** | Having a $1,000 overdraft limit | Having an account balance of -$50 |
### Summary: – **Overdraft** is the service or facility that allows you to borrow money from the bank when your account balance is low. – **Overdrawn** refers to your account being in negative territory, meaning you’ve used more money than you have available.
In essence, you use an **overdraft** to cover the situation of being **overdrawn**.
Hello Sir I have two questions. a) Is it a mandated requirement to make a bank reconciliation statement? Or could we just make the corrections to the cash book without having to actually prepare a bank reconciliation statement?
b) If I am doing an audit for someone and I’m looking at bank statements and cash receipts over a 6 month period. Do I still need to make the bank reconciliation statements at the end of each period?
Im curious to know whether making these statements are simply for correction purposes or are they actually mandated by law
They are certainly not mandated by law. However they are one of the most obvious checks that can be made and most companies will do them once a month. The auditors will do them at the end of whatever period they are auditing.
Hello, another great lecture, however I do have one question. Could we not treat outgoing cheques as payables? Both are expected payments from the business and we have not paid any money until it has left our account? Or could we not wait until the payment has left our account to record this supplier payment? Thanks!
Hi Prof, I’m little bit confused here, why’re you always crediting the bal. of my cash to the credit side, let me give an example I have $1000 and give out $20 USD my bal. should only appear or the debit side of my account, I’m from Liberia.
If you start with a debit balance of $1,000 and then pay out $20, you credit cash with $20. When we come to balance off the account, the missing figure to make both side add up to the same is $980 on the credit side. We then show that on the opposite side as a debit balance on the account.
I explain the correct way to balance off accounts in the earlier lectures on double-entry bookkeeping.
Thank you for your wonderful lessons. Like others, I have a question too.
This questions is related with the example on the next lesson but I want to relate it too with video of the lesson above til min 12:30 regarding Lodgements.
In the example 1 on next lesson, item 5: there’s a lodgements of $4000 not yet appeared on bank statement, (according to video above til min 12:30 on lesson above) means that this amount is already receipt in our cash account that have a Debit Balance of $11,820. If so, that this amount of $4000 IS INCLUDED in balance $11,820 of cash a/c, then Why this amount is ADD in bank reconciliation statement at the end to explain the difference timing and adding this value to adjust/reach the amount of $15,000 on bank statement???
The 4,000 is already included in the cash book balance. However it is not on the bank statement and therefore the balance on the bank statement is lower by 4,000. So to make them agree the balance on the bank statement needs increasing by 4,000.
Hi sir, If I received some cheques from some clients in September, I would debit the bank and credit the Receivables but I never lodge those cheques until October. Is those cheques recorded as cash in hand on the balance sheet? Or they are still apart of the bank but is recorded is added as outstanding lodgement on the bank reconciliation
The cheques are entered in the cash account as received when the cheques are received. If they have not yet been paid into the bank, then they also appear on the reconciliation statement as outstanding lodgements.
Thank you sir, that is what I know and the auditor is telling me that they are cash in hand because they weren’t lodge until the following month. Thank you so much again.
In the financial statements we normally don’t show cash in hand and cash at bank separately.
With regard to what the auditor has told you – that is correct and is what I wrote in my previous reply.
The cheques received are entered in the cash amount when they are received and therefore do appear as an asset in the financial statements. If they have not been paid into the bank then they also appear on the bank reconciliation statement, otherwise the cash balance will not agree with the bank balance.
Have you watched the further lectures on bank reconciliations?
Yes sir I did. However, the auditors do show Cash in Hand different from Cash at Bank on the balance sheet. Hence why I am saying it shouldn’t be shown as cash in hand because they use the cash in hand only for the petty cash.
right Sir but if question does not mention if it is payment or receipt so how will we treat credit transfer ? because i have been doing questions which do not mention of it being either payment or receipt
sashafarah says
I wish you did all the ACCA lectures. Great teacher
John Moffat says
Thank you 馃檪
Sanweyne says
What is the difference between Overdraft and Overdrawn in bank balance?
Dilna says
The terms **overdraft** and **overdrawn** are closely related in banking, but they refer to different aspects of the same financial situation. Let鈥檚 break down the difference:
### 1. **Overdraft**:
– **Definition**: An **overdraft** is a banking service or arrangement where a bank allows an account holder to withdraw more money than is actually available in their account, up to a certain limit. Essentially, the bank extends a short-term loan to the account holder to cover transactions when the balance becomes negative.
– **Key Characteristics**:
– **Pre-arranged facility**: The bank and account holder agree on an overdraft limit beforehand.
– **Limit**: There is typically a maximum limit (e.g., $2,000), beyond which the account holder cannot withdraw.
– **Interest/Fees**: Banks usually charge interest or fees on the overdrawn amount until it is repaid.
– **Example**: If you have an overdraft limit of $1,000 and your account balance is $0, you can still make a payment of $500 because the bank will cover it through the overdraft.
### 2. **Overdrawn**:
– **Definition**: **Overdrawn** refers to the state of your bank account when you have withdrawn more money than is available, causing your balance to fall below zero. When an account is overdrawn, it means you have used the overdraft facility (if available) or have gone into a negative balance without permission.
– **Key Characteristics**:
– **Account status**: It describes the current condition of your account balance (negative or below zero).
– **Potential Fees**: If you overdraw without having an overdraft agreement, the bank might charge overdraft fees or refuse the transaction (non-sufficient funds or NSF).
– **Example**: If you have $100 in your account and you make a purchase of $150, your account becomes overdrawn by $50.
### Key Differences:
| **Aspect** | **Overdraft** | **Overdrawn** |
|————————–|———————————————|—————————————–|
| **Nature** | A facility or service offered by the bank | The state of your bank account |
| **What it Refers To** | An agreement that allows you to withdraw more than your balance (up to a limit) | The condition of your account being below zero (negative balance) |
| **Loan or Balance** | Overdraft is a form of short-term loan | Overdrawn means your balance is negative |
| **Fees/Interest** | Banks usually charge interest/fees on overdrafts | May lead to overdraft fees if unauthorized |
| **Example** | Having a $1,000 overdraft limit | Having an account balance of -$50 |
### Summary:
– **Overdraft** is the service or facility that allows you to borrow money from the bank when your account balance is low.
– **Overdrawn** refers to your account being in negative territory, meaning you’ve used more money than you have available.
In essence, you use an **overdraft** to cover the situation of being **overdrawn**.
Irv.12 says
Hello Sir I have two questions.
a) Is it a mandated requirement to make a bank reconciliation statement? Or could we just make the corrections to the cash book without having to actually prepare a bank reconciliation statement?
b) If I am doing an audit for someone and I’m looking at bank statements and cash receipts over a 6 month period. Do I still need to make the bank reconciliation statements at the end of each period?
Im curious to know whether making these statements are simply for correction purposes or are they actually mandated by law
John Moffat says
They are certainly not mandated by law. However they are one of the most obvious checks that can be made and most companies will do them once a month. The auditors will do them at the end of whatever period they are auditing.
Ocean2k20 says
Hello, another great lecture, however I do have one question. Could we not treat outgoing cheques as payables? Both are expected payments from the business and we have not paid any money until it has left our account? Or could we not wait until the payment has left our account to record this supplier payment?
Thanks!
John Moffat says
We record the payment in the cash account immediately we write the cheque. It is so that the balance shows how much we still have available to spend.
blamohjulius says
Hi Prof, I’m little bit confused here, why’re you always crediting the bal. of my cash to the credit side, let me give an example I have $1000 and give out $20 USD my bal. should only appear or the debit side of my account, I’m from Liberia.
John Moffat says
If you start with a debit balance of $1,000 and then pay out $20, you credit cash with $20.
When we come to balance off the account, the missing figure to make both side add up to the same is $980 on the credit side.
We then show that on the opposite side as a debit balance on the account.
I explain the correct way to balance off accounts in the earlier lectures on double-entry bookkeeping.
accadenislux says
Hello sir,
Thank you for your wonderful lessons.
Like others, I have a question too.
This questions is related with the example on the next lesson but I want to relate it too with video of the lesson above til min 12:30 regarding Lodgements.
In the example 1 on next lesson, item 5: there’s a lodgements of $4000 not yet appeared on bank statement, (according to video above til min 12:30 on lesson above) means that this amount is already receipt in our cash account that have a Debit Balance of $11,820.
If so, that this amount of $4000 IS INCLUDED in balance $11,820 of cash a/c, then Why this amount is ADD in bank reconciliation statement at the end to explain the difference timing and adding this value to adjust/reach the amount of $15,000 on bank statement???
Thank you again for yours magnificent lessons!
John Moffat says
The 4,000 is already included in the cash book balance. However it is not on the bank statement and therefore the balance on the bank statement is lower by 4,000. So to make them agree the balance on the bank statement needs increasing by 4,000.
accadenislux says
Sir, thank you for the fast reply and for the clear explanation.
The ACCA lessons seems more easy with your lecture.
Thank you again!
ABDULLAH2003 says
good way of explaining sir,
amazing understood the way how to do bank reconcilitions
amazing
hanscad007 says
Who else thinks John Moffat is very funny.
Especially that example of money being mistakenly deducted from his sister’s account
Great lecture sir.
Love the way you simplify things
John Moffat says
Thank you for your comment 馃檪
radhwaan says
Haha yes agreed!
Camille says
Hi sir, If I received some cheques from some clients in September, I would debit the bank and credit the Receivables but I never lodge those cheques until October. Is those cheques recorded as cash in hand on the balance sheet? Or they are still apart of the bank but is recorded is added as outstanding lodgement on the bank reconciliation
John Moffat says
The cheques are entered in the cash account as received when the cheques are received. If they have not yet been paid into the bank, then they also appear on the reconciliation statement as outstanding lodgements.
Camille says
Thank you sir, that is what I know and the auditor is telling me that they are cash in hand because they weren’t lodge until the following month. Thank you so much again.
Camille says
And I know for a fact that cash in hand refers to coins and notes (paper money).
John Moffat says
In the financial statements we normally don’t show cash in hand and cash at bank separately.
With regard to what the auditor has told you – that is correct and is what I wrote in my previous reply.
The cheques received are entered in the cash amount when they are received and therefore do appear as an asset in the financial statements. If they have not been paid into the bank then they also appear on the bank reconciliation statement, otherwise the cash balance will not agree with the bank balance.
Have you watched the further lectures on bank reconciliations?
Camille says
Yes sir I did. However, the auditors do show Cash in Hand different from Cash at Bank on the balance sheet. Hence why I am saying it shouldn’t be shown as cash in hand because they use the cash in hand only for the petty cash.
John Moffat says
Fair enough, although it is irrelevant for the exam 馃檪
Camille says
Thank you so much sir for understanding. I do appreciate this and thank you for allowing me to understand too. I’m taking this exam in December.
tauqeer1996 says
Sir is credit transfer credited in the cash book balance or not?
John Moffat says
If it is a payment by credit transfer then yes – we credit cash.
It is a receipt by credit transfer then we debit cash.
(The word credit in credit transfer is nothing to do with debits or credits – it is just another word for a bank transfer)
tauqeer1996 says
right Sir but if question does not mention if it is payment or receipt so how will we treat credit transfer ? because i have been doing questions which do not mention of it being either payment or receipt
John Moffat says
Exam questions will make it clear.
acca776 says
Excellent lecture!
John Moffat says
Thank you 馃檪