Define Overdraft.

• A. A short term loan from a bank
• B. A long term loan
• C. An asset
• D. An expense

Answer: (A)

Overdraft is a short-term source of finance from a bank that lets a business withdraw more money from its account than it has, up to an agreed limit. It’s used to cover temporary cash-flow gaps and is typically repayable quickly or on demand. On the books, it’s a liability because the business owes the bank the overdrawn amount, and interest (and possibly fees) is charged on that balance. It isn’t a long-term loan with extended repayment terms, nor is it an asset, since it represents money owed rather than owned. It isn’t an expense itself—the cost comes from interest and charges incurred on the overdrawn funds.