Question

why bank overdraft is not treated as contra entry? explain

Answer 1

Dear Student,

An entry is treated as contra entry when an individual transaction would impact the balances of both our Cash at business & Bank A/c balance or cash & Bank Balance i.e. it would cause debit to cash A/c and credit to bank a/c or vice-a-versa.

Bank overdraft is a situation wherein the bank allows you to withdraw excess amount over its balance up to a certain limit. So, in situations when the bank balance goes negative it would be termed as bank overdraft. This situation arises when the bank balance was not sufficient & payment was made through cheque. Since, the current scenario is not affecting the business cash balance, it would not be treated as contra entry.

Regards,