Every time I open the pages of Accounting Today and turn to the "Spirit of Accounting" column, I'm not sure whether I should don my clown outfit or sackcloth and ashes. The article titled "This accounting for cash is not outstanding" (Jan. 7-27, 2008, page 15) is no exception.
It isn't clear from the authors' words whether the checks in the "zero balance" bank account were negotiated on the day written, or when the transfer was made to cover the checks from another bank/bank account. It would clearly be a bank overdraft if the checks were negotiated before the transfer of funds to cover was made. This clearly would be a liability and should be stated as a bank overdraft in the currently liability section of the balance sheet at the top of the list.
It's against the law to draw and negotiate a check on a bank account for which there are no funds to cover and there is no overdraft agreement with the bank. In fact, it's probably a criminal action. This would require a disclosure footnote to the financial statements. There is no legal, moral or other right to offset this overdraft against cash balances in other banks or against cash items not held in the bank where the overdraft was made. The authors appear to be making up their own negotiable instruments law. The cure for the manipulation of balance sheet data is not burying the information, but adequately and fully disclosing it and letting the financial analysts make their own calculations and judgment calls.
If the checks were negotiated until they were covered by a cash transfer to fully cover the amounts, and a financial statement was drawn before the overdraft was covered, then the overdraft is accounts payable. If, after the balance sheet date, the overdraft was not covered, this would also require a footnote.
To convey the thought that this disingenuous presentation of the above conditions might alleviate the problem by offsetting the overdraft against existing cash balances only serves to obfuscate a serious problem and is not full disclosure.
Our job is full and proper disclosure, not obfuscation.
Abraham Tawil, CPA
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