A Bank Overdraft occurs when your company makes a payment that exceeds the available balance in its bank account. The bank honors the payment anyway, creating a negative balance. In effect, the bank has extended short-term financing to cover the shortfall.

The critical distinction from a formal Loan Payable: an overdraft is not a loan agreement. There is no fixed repayment schedule, no loan contract, and no formal borrowing process. It is simply the bank allowing your account balance to go below zero, with interest charged on the negative balance .

In AccountingSuite, the bank account (10000 Bank Accounts or 10011 Bank Account Currency) is normally an asset account. When the balance goes negative, the economic reality is that you owe money to the bank.

1. Payment Creates a Negative Balance #

Scenario: You have AED 1,000 in your bank account. You pay a supplier AED 1,200. The bank allows the payment, creating an overdraft of AED 200.

You record the payment normally:

Document	Debit	Credit
Bill Payment / Payment	20000 Accounts Payable (or relevant expense account)
		10000 Bank Accounts (or 10011 Bank Account AED)

After this entry, the bank account balance in AccountingSuite is negative AED 200. This negative balance represents the overdraft – money you now owe to the bank.

Important: At this point, the negative balance is sitting in an asset account. For proper financial reporting, you should reclassify the overdraft amount to a liability account. See Step 3 below.

2. Daily Interest Accrues on the Negative Balance #

Banks charge interest on overdrafts based on the daily negative balance . The bank calculates this daily, but typically only charges it to your account at month-end.

At the end of the accounting period (usually month-end), you accrue the interest that has accumulated but not yet been charged:

Document	Debit	Credit
Journal Entry	90100 Interest Expense
		21100 Interest Payable

This entry matches the interest cost to the period in which the overdraft occurred. The amount is an estimate based on your average negative balance and the bank’s overdraft interest rate.

3. (Optional) Reclassify the Overdraft to a Liability #

For cleaner financial reporting, you may reclassify the negative bank balance to a dedicated liability account at period-end:

Document	Debit	Credit
Deposit / Cash Receipt	10000 Bank Accounts (or 10011 Bank Account AED)
		21700 Bank Overdraft Payable (or 21000 Loans Payable)

This entry brings the bank account balance back to zero (since it was negative) and records the overdraft as a liability. The bank account now correctly shows AED 0, and the liability account shows AED 200.

Note: In AccountingSuite, you may create a dedicated account such as 21700 Bank Overdraft Payable under Liabilities. If you do not want to create a new account, you can use 21000 Loans Payable as a temporary measure, though a dedicated account provides clearer reporting.

4. Recording the Actual Bank Charge and Interest at Month-End #

At month-end, the bank statement will show the actual interest charged and any overdraft fees. You discover these when you perform bank reconciliation.

Recording the Interest #

If the actual interest differs from your accrual, adjust the entry. If you did not accrue interest earlier, record it now:

Document	Debit	Credit
Bank Reconciliation → Service Charge tab, or Payment	90100 Interest Expense (or 21100 Interest Payable if already accrued)
		10000 Bank Accounts (or 10011 Bank Account AED)

In AccountingSuite, you can record this using the Interest Earned & Service Charge tab in the Bank Reconciliation document. This is the recommended method for bank-initiated charges using the 90100 Interest Expense account. Alternatively, you can use a Payment document with the bank as the payee and no bill attached with 90100 Interest Expense (or 21100 Interest Payable if already accrued).

Recording the Bank Fee #

Banks often charge a separate overdraft fee or account maintenance fee in addition to interest. This is not interest – it is a service charge:

Document	Debit	Credit
Bank Reconciliation → Service Charge tab, or Payment	60020 Bank Fees
		10000 Bank Accounts (or 10011 Bank Account AED)

In AccountingSuite, both the interest and the fee can be recorded on the Interest Earned & Service Charge tab during bank reconciliation.

5. (Optional) Repaying the Overdraft #

If you applied optional Step 3, when you deposit funds to bring the bank account back to a positive balance, the overdraft liability is eliminated.

Document	Debit	Credit
Payment	21700 Bank Overdraft Payable (or 21000 Loans Payable)
		10000 Bank Accounts (or 10011 Bank Account AED)

If the deposit also covers accrued interest, split the entry: debit the liability for principal and debit 21100 Interest Payable for interest.

If you did not reclassify the overdraft to a liability in Step 3, any Deposit or Cash Receipt from your customers or any Bank Transfer from different Bank Account simply increases the negative bank balance back toward zero. No separate liability account is involved.

Document	Debit	Credit
Deposit / Cash Receipt / Bank Transfer	10000 Bank Accounts (or 10011 Bank Account AED)
		12000 Accounts Receivable (or other Bank Accounts)