Is a Bank Overdraft an Asset? How It Shows on Your Balance Sheet
A drawn bank overdraft is a liability, not an asset. How it shows on an Australian balance sheet, when it counts as cash, and how lenders read it.
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Bank Overdraft · Balance Sheet · Cash Flow Statement
Plenty of owners talk about their overdraft limit as if it were money the business has. It is not. A drawn bank overdraft is a liability, the unused limit is not an asset, and the way it sits in your accounts shapes how a lender reads your business.
Quick Answer
A drawn bank overdraft is a liability, usually a current one because the bank can call it on demand, and the unused part of the limit is not an asset. It shows with borrowings in your financial statements, although the cash flow statement can treat an overdraft that is an integral part of cash management as part of cash. Lenders then read both the drawn balance and the approved limit, as covered in our business overdraft guide.
Also called: bank overdraft in accounting, overdrawn bank balance, cash overdraft. "Cash overdraft" is mostly overseas usage for the same thing.
Is a bank overdraft an asset or a liability?
A bank overdraft is a liability, because once you draw on it the business owes that money to the bank, and a drawn overdraft is a current liability because it is repayable on demand. It is borrowing that happens to sit on your bank account, not money the business holds.
The confusion usually comes from where the overdraft lives. Your business bank account is normally an asset, shown as cash at bank. While the balance is positive, that is exactly what it is. When the balance drops below zero, the account changes sides: the negative amount is money borrowed from the bank, so on your reporting date it belongs with liabilities, not cash. Same account, different side of the balance sheet, depending only on the balance on the day the books are closed.
The second source of confusion is the limit itself. Owners often say they "have" an overdraft of a certain size, meaning the approved credit limit. That limit is the bank's promise to lend up to a ceiling. Until you draw on it, nothing is owed, and nothing is owned either. For how the product works day to day and what it costs, the business overdraft guide covers the basics; this insight stays on the accounting and lender view.
Is an unused overdraft limit an asset?
An unused overdraft limit is not an asset: the unused limit is not an asset because the business has not received anything and does not own anything until it draws. It is not recorded as cash, and it does not appear in the totals on the face of the balance sheet.
The useful split is drawn balance and undrawn limit. The drawn balance is a real debt and is recorded as a liability. The undrawn limit is borrowing capacity, and at most it is mentioned in the notes to the accounts so a reader can see how much short-term funding the business could reach if it needed to. Some businesses disclose it, many small businesses do not.
Where this matters most is cashflow forecasting. Counting the undrawn limit as headroom in a forecast is reasonable, as long as everyone reading the forecast knows it is borrowed headroom the bank can review, not cash on hand. Whether and how to disclose an undrawn facility in your notes is a call for your accountant.
How does an overdraft show on the balance sheet?
An overdraft shows on the balance sheet as a current liability, usually listed with borrowings, because the bank can demand repayment at any time. Being repayable on demand means the business has no right to put repayment off for twelve months, so the overdraft is current even if you have run it for years and expect to keep it.
It is shown on its own line, or grouped with other short-term borrowings, rather than netted against money sitting in other accounts. If the business has a positive operating account and a separate overdrawn account, the positive balance stays in cash and the overdrawn balance stays in liabilities. Offsetting the two is only appropriate where there is a legal right to set them off and an intention to settle on a net basis, so do not net them unless your accountant confirms a right to do so.
In deals I've seen, the most common slip in management accounts is an overdrawn account left in the assets section as a negative cash figure. It looks harmless, but it understates both cash and liabilities, and a credit analyst reading your accounts will restate it before doing any ratio work.
Can an overdraft count as cash in the cash flow statement?
An overdraft can count as cash in the cash flow statement in one specific case: where it is repayable on demand and forms an integral part of cash management, the accounting standard allows it to be included in cash and cash equivalents. Outside that case, it is treated like other bank borrowing.
In plain words, paragraph 8 of AASB 107 Statement of Cash Flows says bank borrowings are generally financing activities. The exception is an overdraft that works as part of how the business runs its day-to-day cash, repayable on demand and an integral part of cash management. The standard points to a telltale sign: the balance often swings between positive and overdrawn.
An overdraft that dips below zero before customer receipts land and climbs back after fits that description. An overdraft that sits fully drawn month after month looks more like ordinary borrowing and is usually shown as financing.
This produces a result that confuses many owners. When the overdraft is included in cash and cash equivalents, the closing cash figure in the cash flow statement is net of the overdraft, while the balance sheet still shows the overdraft as a liability. Both presentations are correct; the notes reconcile the two. Which treatment fits your business is your accountant's call, based on how the facility is actually used.
How does an overdraft change working capital and the current ratio?
An overdraft changes working capital and the current ratio only through what the drawn money is used for, because the drawn balance always lands in current liabilities. Working capital is current assets minus current liabilities. The current ratio is current assets divided by current liabilities. Neither has a single correct figure; what lenders read is the direction and the reason behind it.
| Line | Before drawing | After drawing to pay suppliers | After drawing to buy equipment |
|---|---|---|---|
| Current assets | $200,000 | $200,000 | $200,000 |
| Current liabilities (including overdraft) | $100,000 (overdraft nil) | $100,000 (overdraft $40,000, supplier debts down $40,000) | $140,000 (overdraft $40,000) |
| Working capital | $100,000 | $100,000 | $60,000 |
| Current ratio | 2.0 | 2.0 | About 1.4 |
Paying suppliers from the overdraft swaps one current liability for another, so the totals do not move, although the creditor has changed from a supplier to a bank that can call the money in.
Buying equipment from the overdraft is different: the equipment is a long-life asset that sits outside current assets, while the debt that paid for it is current, so working capital and the ratio both fall. That mismatch is one of the first things a credit assessor notices, because short-term debt is now funding something that pays back over years and draws on future cashflow.
A revolving facility works best covering short gaps that clear, as set out in how to use a business line of credit safely. Longer-life purchases usually sit better on a term facility, such as one of the business loans structured around the asset's life.
How do lenders read an overdraft in your financials?
Lenders read two numbers, the drawn balance on the balance sheet and the approved limit behind it, and many lenders assess the full limit, indicative and varies by lender, when they test whether the business can afford new debt. The drawn balance shows what you owe today; the limit shows what you could owe tomorrow.
Because a lender has to assume the limit could be fully drawn, many build a notional repayment on the whole limit into their serviceability test, even when the balance is close to zero. That is why a large overdraft nobody uses can still reduce how much a business can borrow elsewhere. An idle limit is worth reviewing before a new application, because reducing it ahead of time can sometimes improve the result, depending on the lender.
Lenders also look at whether the overdraft ever clears. A balance that swings and returns towards zero reads as working capital doing its job. A balance that sits near the limit all year reads as permanent funding, and some lenders treat it more like term debt. Time spent past the limit reads worse again, as covered in what happens when you go over your overdraft limit.
They test what the financials say against the account itself, which is covered in how lenders read business overdraft bank statements, and against turnover reported on your BAS; the BAS form explained insight shows how lenders read those labels.
If the overdraft has become funding the business relies on every month, it may be worth looking at a business line of credit sized and structured for that use, so the facility and the financials tell the same story. More guides for owners in the same position sit on the Business Owners Hub.
How do you record an overdraft in your accounts?
You record an overdraft as a negative balance on the bank account in your ledger, with interest and fees recorded as expenses, and you reconcile it to the bank statement like any other account. Nothing is recorded when the limit is approved; entries only start when money moves.
- Keep one ledger account per bank account. When the account goes below zero, let the ledger show the negative balance rather than creating a separate loan entry for the overdraft.
- Record interest and fees as expenses. Overdraft interest, facility fees and account fees are usually recorded as finance costs in the period they are charged.
- Reconcile every statement line. Match each interest and fee charge on the bank statement to a ledger entry, so the closing balance agrees with the bank.
- Check classification at period end. Many accounting systems keep a bank account in the assets section even when it is overdrawn. Ask your accountant to present it as a current liability in the year-end statements.
- Leave the limit out of the ledger. The approved limit is not recorded as an asset or a liability; if it is mentioned at all, it belongs in the notes.
Whether overdraft interest is tax deductible for your business is covered in the business overdraft guide, and your accountant confirms how it applies to you.
A bank overdraft is a liability, not an asset. Once drawn, it is a current liability because it is repayable on demand, and the unused limit is not recorded anywhere except, at most, in the notes. The cash flow statement can treat an overdraft that is an integral part of cash management as part of cash, while the balance sheet still shows it as debt. Lenders read the drawn balance and the full limit, so how the overdraft is used and presented flows straight into your borrowing capacity.
Key takeaway: Treat the overdraft limit as borrowed headroom, keep the drawn balance on the liabilities side of your books, and size the limit to what you actually use before your next application.Frequently Asked Questions
An overdraft is not a current asset; when it is drawn, a bank overdraft is a current liability because the bank can demand repayment at any time. The account it sits on is an asset only while its balance is positive. Once the balance goes below zero, the negative amount moves to the liabilities side of your financial statements.
In accounting, a bank overdraft is the negative balance on a bank account where the bank has approved borrowing up to a set limit, and it is recorded as a current liability. Interest and fees on it are recorded as expenses. In the cash flow statement, an overdraft that is repayable on demand and regularly swings between positive and overdrawn can be included in cash and cash equivalents.
A bank overdraft is a current liability in almost every case, because it is repayable on demand and the business has no right to put off repayment for twelve months. That holds even if you have run the same overdraft for years and expect to keep it. Lenders read it the same way, as short-term debt that sits against your cashflow.
An overdraft affects your current ratio whenever it is drawn, because the drawn balance is counted in current liabilities. Using it to pay suppliers usually swaps one current liability for another, while using it to buy equipment lowers the ratio because a long-life asset is now funded by short-term debt. Lenders also look at the approved limit when they test serviceability, not just the ratio.
Overdraft interest is recorded as an expense, usually under finance costs, in the period it is charged, along with any facility or account fees. It reduces profit in your accounts, and each bank statement charge should be matched to a ledger entry when you reconcile. Whether that interest is deductible for tax is covered in our business overdraft guide, and your accountant confirms it for your business.
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