What happens to the Cash account if a company overdraws its bank account?

When a company overdraws its bank account, it means that the company has withdrawn more money than it has available in the bank. This situation results in a liability for the company, as it now owes the bank money. In accounting, when the bank account shows a negative balance due to the overdraft, the Cash account on the company’s books will reflect this negative status as a temporary credit balance.

A credit balance in the Cash account signifies that the company has less cash on hand than its records indicate, effectively acknowledging that the company is borrowing from the bank. This temporary credit indicates the obligation to the bank, as the company must eventually deposit sufficient funds to cover the overdraft and restore the account to positive status.

The other choices do not accurately reflect the nature of the Cash account during an overdraft situation. A normal debit balance would suggest that the company has cash readily available, whereas a zero balance would imply that there are no funds or obligations present. A temporary debit balance may suggest a situation where funds are available but are currently tied up or pending, which does not accurately represent an overdraft scenario.