Tuesday 16 July 2013

What do negative cash balances mean?

 Reasons for negative cash balances

There are two possible reasons for a negative cash balance.

a) A bank accepted a company's checks without sufficient funds in the company's bank account
A company has a bank account. The company issues (cuts) checks to its vendors against the cash balance in the bank account. Suppose during December 2009, the company issued checks amounting to $45,000. All checks were presented by the vendors to the bank for clearance. Let's also assume that the company only had $40,000 in the bank account. So, $5,000 of checks could not be settled with the available cash in the bank. The bank, however, had an agreement with the company whereby the bank accepted the company's checks from the vendors and settled them by creating an overdraft. Therefore, at December 31 the company had zero cash and a negative balance representing an overdraft.
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2 comments:

  1. I like your post.Very impressive way of writing....appreciate the great information about accounting many thanks..
    Accountant toowoomba

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