Company A has a bank account with Bank X with a balance of $50,000 and an overdraft of $10,000 in a separate account at Bank Y. The accounts are not linked. How should these be reported on the balance sheet?

Answer options:

Cash of $40,000.

Cash of $50,000 and a negative Cash balance of $10,000.

Cash of $50,000 and a Current Liability of $10,000.

Cash of $40,000 and disclose the overdraft.

How to approach this question

Rule: You can only net overdrafts against cash if they are at the SAME bank. Different bank = Current Liability.

Full Answer

C.Cash of $50,000 and a Current Liability of $10,000.✓ Correct

Under US GAAP, overdrafts at one bank cannot be offset against cash balances at another bank. The $10,000 overdraft is reported as a current liability (e.g., Accounts Payable or Short-term Debt).

Common mistakes

Netting the balances to show $40k cash.

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