Which Statement Regarding Negative Cash Balances is True

How should you account for cash overdrafts (also chosen negative greenbacks balances) on a remainder sheet and in a cash flow statement? At that place are dissimilar ways to do so. I explain those accounting methods below.

It is year-stop and your inspect customer has three banking company accounts at the same depository financial institution. Two of the accounts take positive balances (the first with $50,000 and the second with $200,000). The tertiary account has a negative cash balance of $400,000. Since a cyberspace overdraft of $150,000 exists, how should we present greenbacks in the financial statements?

Cash Overdraft in Balance Canvass

In the rest canvas, show the negative cash balance as
Cash Overdraft
in the electric current liabilities. Or you lot tin also include the corporeality in accounts payable.

If you are netting
the three banking concern accounts, consider using the
Cash Overdraft
option. If you coffin the overdraft in accounts payable, the financial statement reader may retrieve,“there is a fault, where is greenbacks?” Using
Greenbacks Overdraft
communicates more clearly. (The right of start must exist in order to net bank accounts. The right of get-go commonly exists for multiple bank accounts with one banking concern.)

Some companies take multiple bank accounts with multiple banking institutions. In such cases, the net balance of 1 depository financial institution might be positive and the net balance of the second bank might be negative. Then the company would reflect the positive balance as cash and the negative greenbacks balance (of the second bank) as an overdraft.

Suppose a company has depository financial institution accounts with two different banks and the internet remainder of the get-go depository financial institution is $1,350,000 and the net remainder of the 2nd bank is an overdraft of $5,000. So bear witness cash equally 1 amount on the balance sheet ($1,345,000). The $v,000 is not material.

Cash Overdraft in Greenbacks Flow Statement

Some companies do non include overdrafts in the definition of cash; instead,
they include it in accounts payable. Consequently, the company treats the overdraft every bit an operating action (alter in accounts payable). So, the visitor includes the negative cash as a alter in a liability in the operating section of the cash flow statement. (Some accountants treat overdrafts as a financing action, but they clear rapidly. Therefore, an operating activity classification is more appropriate.)

Alternatively, include the negative greenbacks in the definition of cash
(rather than in accounts payable). In doing then, y’all combine the greenbacks overdraft with other cash (that with positive balances) in the cash flow statement. The beginning and ending greenbacks–in the cash flow statement–should include the negative cash amounts.

FASB ASC 230-10-45-4 requires that the total amounts of cash and cash equivalents in the cash catamenia statement agree with similarly titled line items or subtotals in
the balance sheet. If negative greenbacks is included in the definition of cash, the cash captions in the argument of greenbacks flows should be revised appropriately (eastward.grand.,
Greenbacks (Cash Overdraft) at cease of twelvemonth).

If the balance sheet contains a positive cash balance in avails and a cash overdraft in liabilities, provide a reconciliation a
t the lesser of the greenbacks flow statement (or in a disclosure). In the reconciliation, show the composition of the balance–ane line titled
Greenbacks, one line titled
Cash Overdraft, and a total line titled
Total Cash (Cash Overdraft).

One Other Consideration

If checks are created only non released past yr-stop, reverse the payment.
Merely
printing checks does non relieve payables. Payables are relieved when payment is fabricated (checks are printed and mailed, or electronic payments are candy).

Meet my post about auditing cash.