If the entity takes out money more than the balance available in the bank account, the bank balance goes into negative. The amount of this negative balance is called Bank Overdraft or simply OD. Under this facility from the bank, whenever, a check is presented into the bank for the amount more than the available balance, the bank honors the check.
Usually, the entity arranges an agreement with the bank to decide the limit of the bank overdraft. In case, the limit exceeds, bank charges a higher interest rate and higher fees than the normal rates.
Presentation in the Balance Sheet
Bank overdraft is adjusted with the cash and cash equivalent. If there is not a sufficient balance in the cash and cash equivalent, the overdraft figure is shown on the liability side of the statement of financial positions.
Statement of Cash Flows and Bank Overdraft
IFRS allows bank overdraft to be adjusted along with cash and cash equivalent. However, US GAAP does not allow this treatment. It requires the bank overdraft figure to be presented in the cash flow from financing activities.