1. Credit balance in the cash column of the cash book
2. Credit balance in the bank column of the cash book
3. Neither of the two
4. Both (a) and (b)
Overdraft as per cash book means?
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The correct answer is 2. Credit balance in the bank column of the cash book.
The credit balance in the bank column of Cash Book represents the overdraft facility utilized by the business. Overdraft is a credit extension facility offered by banks to both savings and current account holders. It allows the account holder to borrow a specified sum of money over and above the balance in their accounts.
It is a form of short-term borrowing offered by banks and is extremely useful for businesses to resolve short-term cash flow issues.
The account holder can withdraw money even when his/her account does not have enough balance to cover the withdrawal. Since the business is withdrawing money that is not in its account, an overdraft is represented by a negative bank balance. That is why they are shown as a credit balance in the bank column of the Cash Book.
Overdraft is a liability for the business. Hence, it is shown on the Equity and Liability part of the Balance Sheet under the head Current Liabilities and sub-head Short Term Borrowings.
Banks do not offer this facility to all customers. Only those who have a good reputation and credit score are eligible for this facility. Like any other borrowing, interest is charged on the amount utilized by the account holder as an overdraft.