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rafapak


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interest paid on overdraft
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hi guys

I have exercises where I have to classify items to credit or debit side of trial balance.

I have troubles to interpret what interest paid on overdraft is. My thinking is that if you have bank overdraft you are supposed to pay your debt within certain period of time. If you don't pay within this period of time you are supposed to pay more to the bank. Is this what interest paid on overdraft really is ?

 



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Cheshire


Master Book-keeper

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You will pay interest on an overdraft, calculated daily on the day you go overdrawn and until the overdraft is repaid.

Take care with any questions as you might be asked about interest received, which is interest earned on savings.


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 Joanne 

Winner of Bookkeeper of the Year 2015, 2016 & 2017 

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

You should check out answers with reference to the legal position
rafapak


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Cheshire wrote:

You will pay interest on an overdraft, calculated daily on the day you go overdrawn and until the overdraft is repaid.

Take care with any questions as you might be asked about interest received, which is interest earned on savings.

 Thanks for reply Joanne, so is interest on an overdraft my liability or expense ? Should it be included on debit or credit side of my trial balance?



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Cheshire


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Hi Rafal
The overdraft itself is a liability, therefore a credit.

The interest is a 'cost of credit' , ie a charge by the Bank for borrowing the money, so it's an expense ie a debit.

Hth

__________________

 Joanne 

Winner of Bookkeeper of the Year 2015, 2016 & 2017 

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

You should check out answers with reference to the legal position
rafapak


Senior Member

Status: Offline
Posts: 396
Date:
Permalink Closed

Cheshire wrote:

Hi Rafal
The overdraft itself is a liability, therefore a credit.

The interest is a 'cost of credit' , ie a charge by the Bank for borrowing the money, so it's an expense ie a debit.

Hth

 thanks



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