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Accounting for overdraft facility in cash flow
11-06-2011, 07:15 AM
Post: #1
Accounting for overdraft facility in cash flow
Dear members,
I am enquiring about the best practice to account for overdraft facility in cash flow statement in line with IFRS requirements.
If a company has an overdraft, one would expect the bottomline of its cash flow statement to be negative. But companies normally don't account for overdraft in cash flow statements. They account it as creditors or payables in balance sheet while their cash flow statements show a positive end balance. I wonder how do they manage to do that.
My understanding is that overdraft will be used to buy working capital items of the business which in turn should affect the working capital elements in cash flow statement hence the effects of overdraft should be fully reflected in cash flow statement and the balance in the cash flow statement should be a negative balance if one has a net overdraft facility.
Any guidance on this will be highly appreciated.
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11-28-2011, 02:13 AM
Post: #2
 
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Shafi</i>
<br />Dear members,
I am enquiring about the best practice to account for overdraft facility in cash flow statement in line with IFRS requirements.
If a company has an overdraft, one would expect the bottomline of its cash flow statement to be negative. But companies normally don't account for overdraft in cash flow statements. They account it as creditors or payables in balance sheet while their cash flow statements show a positive end balance. I wonder how do they manage to do that.
My understanding is that overdraft will be used to buy working capital items of the business which in turn should affect the working capital elements in cash flow statement hence the effects of overdraft should be fully reflected in cash flow statement and the balance in the cash flow statement should be a negative balance if one has a net overdraft facility.
Any guidance on this will be highly appreciated.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Assalam u alaikum...

Dear shafi..

Overdraft facility is actually not a negative balance at your bank account, rather, it is a loan facility provided by the bank! when you are out of cash, your bank provides you with a loan to settle your obligations..
So, having overdraft can never turn your cash to negative. in fact, cash balances can never be negative )- as you cant spend cash if you dont have any Wink - and so the bank balances...rather, when you get negative balance it means that your bank balance is nil and your loan balance is standing!
It is normally called a Running Finance too which is dealt under the head of Short Term borrowings, not in creditors or other trade payables )
so if you take as a loan instead of negative bank balance, i hope your query will be clear )


Regards

Nabeel Munawar
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