What is an overdraft?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
An overdraft lets a business take more money out of its bank account than the account holds, up to a limit agreed with the bank. The amount overdrawn is borrowed money, so interest is charged on it, and the account's balance in the books becomes an amount the business owes rather than cash it holds.
When an account goes into overdraft, its balance in the books flips from money the business has to money it owes. On the balance sheet an overdrawn account is usually shown among current liabilities rather than as a negative asset, and your accountant can confirm how it should be presented.
Bank reconciliation works the same way on an overdrawn account: the statement and book balances may both show amounts owed, and any differences between them, such as payments that have not yet cleared, are explained in the usual way. Interest and fees on the overdraft appear on the bank statement and are recorded as expenses.
In Australia
business.gov.au's glossary describes an overdraft facility as a finance arrangement under which a lender permits withdrawals beyond what an account holds, and calls an account overdrawn once more than its balance has been taken out. Its loan guide treats an overdraft as a kind of line of credit that sits on a business bank account, letting money be taken out even when the account is empty, up to a set limit and with interest charged on the extra funds.
The same guide describes an overdraft as meant for short-term gaps in cash flow rather than for buying assets or funding the business over the long term. Its funding guide includes overdraft services in its list of finance products from banks and other financial institutions.
Worked example
| Date | Transaction | Amount (AUD) | Balance (AUD) |
|---|---|---|---|
| 1 Sep 2026 | Opening balance | 2,400.00 | |
| 5 Sep 2026 | Rent paid | 3,100.00 | 700.00 overdrawn |
| 12 Sep 2026 | Supplier paid | 950.00 | 1,650.00 overdrawn |
| 19 Sep 2026 | Customer payment received | 4,200.00 | 2,550.00 |
| 30 Sep 2026 | Overdraft interest charged | 14.80 | 2,535.20 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Leaving an overdrawn account among the assets as a minus figure without asking your accountant how it should be presented.
- Leaving overdraft interest and fees out of the books until the end of the year.
- Putting off the bank reconciliation while the account is overdrawn, so unrecorded fees and charges build up.
Related terms
Related service
Bank reconciliations
Each bank, card and loan account reconciled to its statement.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.