Many times students taking finance courses often get confused between similar terms like Cash Credit and Bank Overdraft. Many University goers get stressed out and they look to pay someone to take my finance class online. Today we are trying to solve some basic terms which prompt students to ask can I get finance help online?
What is bank Overdraft?
When a company has a negative balance in its bank account, it is said to have a bank overdraft. It is the type of finance in which the checks which are presented to the bank are honored by them even if there is nil balance in the company’s account maintained with the bank and hence results in the negative balance.
Bank overdraft also has a special category called ‘book bank overdraft‘. Under this type, the cash book shows a negative balance while the bank book represents a positive balance. Such a situation arises when the company issues the checks in excess of the balance available with the bank which results in negative balance in the bank books but given that the checks have not been presented as yet to the bank, an actual situation of bank overdraft does not arise.
The next question is how the bank overdraft is treated in the balance sheet of a company. The answer is, if the bank has the authority to counter balance the overdraft of one account with other bank accounts of the customer maintained in the same bank, the same is done and the net balance is shown under the head of cash at bank of the balance sheet. On the other hand, if the bank does not possess the right to set off, the overdraft is presented under the liability head of the balance sheet.
In order to present the bank overdraft for a particular in the cash flow statement, any changes in the overdraft is reported under the head of cash flows from financing activities.
What is Cash Credit?
Cash Credit, which is very similar to the normal line of credit, is defined as issuance of a loan which is of short term in nature to an organization or an entity for doing any business. The cash credit is a type of cash loan which is basically used to fund the expenses of a particular project and task and is repayable within the time frame of one year or less than one year. Once an organization or entity is successful in both receiving and repaying of loan in accordance with the terms agreed upon, it can enable the organization to receive the cash credit on more liberal terms for future use.
Cash credit is the principal method in which the bank extends loan on the condition that the borrower provides their commodities or debt as a security. The cash credit account is more of a current account with the exception that the borrower can withdraw the money from this account over and above the amount deposited into this bank but within the “limit” or the “credit facility” provided by the bank.
The difference between the cash credit and the line of credit is that in cash credit, a cash account is opened by the lender which can be withdrawn by the borrower. Cash credit is also different from the line of credit in the manner that the borrower does not receive the entire amount at one time and that the amount of loan is pre-approved and the repayment plan is similar throughout, whether or not the borrower is actively using it.
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