Bank Overdraft, Cash Credit, and Current Investments in Cash Flow Statement

Bank overdraft, cash credit, and current investments look small in a Cash Flow Statement question, but they can quietly change the final answer.

The confusion is understandable. All three are connected with cash in some way. Bank overdraft and cash credit come from the bank. Current investments can sometimes behave like cash equivalents. So students often ask the same question:

Should this item be included in cash and cash equivalents, or should it be shown separately as a cash flow?

The best answer starts with one simple test.

This one line prevents most mistakes.

The Big Rule: Cash Equivalent or Separate Cash Flow?

A cash flow statement explains how cash and cash equivalents changed during the year.

Cash normally includes:

• cash in hand
• cash at bank
• demand deposits with banks

Cash equivalents are short-term, highly liquid investments that can be converted into a known amount of cash quickly, with very little risk of change in value.

That definition matters because some items sit close to cash but are not always cash equivalents.

Item	Can it be part of cash and cash equivalents?	Separate cash flow if not included?
Bank overdraft	Sometimes, if treated as part of cash management	Yes, usually financing
Cash credit	Usually no	Yes, usually financing
Current investments	Only if they are cash equivalents	Yes, usually investing

The heading in the balance sheet is helpful, but it is not enough. You must read the wording of the question.

Why These Items Cause So Much Confusion

The confusion happens because the same word can appear in different places.

For example, “bank” may appear in:

• bank balance
• bank overdraft
• cash credit from bank
• bank loan

But these are not the same.

A positive bank balance is cash. A bank overdraft is a negative bank balance or borrowing arrangement. Cash credit is a borrowing facility. Current investments are assets, but only some current investments are close enough to cash to become cash equivalents.

In short:

If the item represents	Think of it as
Money already available as cash	Cash or cash equivalent
Money borrowed from bank	Financing activity
Money invested in securities	Investing activity, unless it qualifies as cash equivalent

Once you separate these ideas, the topic becomes much easier.

Bank Overdraft in Cash Flow Statement

A bank overdraft means the bank allows the business to withdraw more money than the available bank balance.

In simple words, the bank balance becomes negative.

Now the treatment depends on how the question presents it.

Case 1: Bank Overdraft Treated as Part of Cash and Cash Equivalents

Sometimes a bank overdraft is repayable on demand and forms part of the business’s day-to-day cash management.

In that case, it may be included in cash and cash equivalents. This means it is not shown separately as a financing activity.

Instead, it affects the opening or closing balance of cash and cash equivalents.

For example:

Particulars	31 March 2025	31 March 2026
Cash at bank	Rs. 40,000	Rs. 70,000
Bank overdraft	Rs. 10,000	Rs. 25,000

If bank overdraft is included in cash and cash equivalents:

Opening cash and cash equivalents = Rs. 40,000 - Rs. 10,000 = Rs. 30,000
Closing cash and cash equivalents = Rs. 70,000 - Rs. 25,000 = Rs. 45,000
Net increase in cash and cash equivalents = Rs. 15,000

There is no separate line saying “bank overdraft raised” or “bank overdraft repaid” in financing activities.

Why? Because it has already been included in the cash and cash equivalents reconciliation.

Case 2: Bank Overdraft Treated as Borrowing

In many school-level questions, bank overdraft is shown as a separate current liability and is treated like a borrowing.

In that case:

• increase in bank overdraft is a cash inflow under financing activities
• decrease in bank overdraft is a cash outflow under financing activities

Example:

Particulars	31 March 2025	31 March 2026
Bank overdraft	Rs. 20,000	Rs. 50,000

Bank overdraft increased by Rs. 30,000.

Treatment:

Cash Flow from Financing Activities
Increase in bank overdraft             Rs. 30,000

If the overdraft had decreased from Rs. 50,000 to Rs. 20,000, the treatment would be:

Cash Flow from Financing Activities
Repayment of bank overdraft           (Rs. 30,000)

Cash Credit in Cash Flow Statement

Cash credit is a bank borrowing facility, usually used for working capital needs. The business can withdraw money up to a sanctioned limit and repay it as funds are available.

For cash flow treatment, cash credit is usually easier than bank overdraft.

Cash credit is generally treated as a borrowing, not as cash and cash equivalents.

So:

• increase in cash credit is a financing inflow
• decrease in cash credit is a financing outflow

Example:

Particulars	31 March 2025	31 March 2026
Cash credit	Rs. 80,000	Rs. 1,20,000

Cash credit increased by Rs. 40,000.

Treatment:

Cash Flow from Financing Activities
Increase in cash credit                Rs. 40,000

If cash credit decreases, it means the business has repaid part of the borrowing.

Example:

Particulars	31 March 2025	31 March 2026
Cash credit	Rs. 1,20,000	Rs. 90,000

Cash credit decreased by Rs. 30,000.

Treatment:

Cash Flow from Financing Activities
Repayment of cash credit              (Rs. 30,000)

Is Cash Credit an Operating Activity?

This is a common doubt because cash credit is used for working capital.

The answer is no.

Cash credit may be used to finance working capital, but the borrowing itself is not an operating activity. It is money raised from a bank. That makes it a financing activity.

Operating activities are linked with the main revenue-producing work of the business, such as selling goods, collecting from customers, paying suppliers, and paying expenses.

Borrowing from a bank is different.

This distinction is very important in mixed questions.

Current Investments in Cash Flow Statement

Current investments are investments expected to be held for a short period. But “current” does not automatically mean “cash equivalent”.

This is where students must be careful.

There are two possible treatments.

Case 1: Current Investments Are Cash Equivalents

If current investments are short-term, highly liquid, readily convertible into known amounts of cash, and subject to insignificant risk, they may be treated as cash equivalents.

In that case, they are included in opening and closing cash and cash equivalents.

Example:

Particulars	31 March 2025	31 March 2026
Cash at bank	Rs. 30,000	Rs. 50,000
Current investments treated as cash equivalents	Rs. 20,000	Rs. 40,000

Calculation:

Opening cash and cash equivalents = Rs. 30,000 + Rs. 20,000 = Rs. 50,000
Closing cash and cash equivalents = Rs. 50,000 + Rs. 40,000 = Rs. 90,000
Net increase in cash and cash equivalents = Rs. 40,000

No separate investing activity is shown for these current investments because the movement is inside cash and cash equivalents.

Case 2: Current Investments Are Not Cash Equivalents

If current investments are ordinary investments and the question does not say they are cash equivalents, purchase and sale of those investments are generally treated as investing activities.

Example:

Particulars	31 March 2025	31 March 2026
Current investments	Rs. 60,000	Rs. 90,000

Current investments increased by Rs. 30,000.

If there is no other information, this usually suggests purchase of investments.

Treatment:

Cash Flow from Investing Activities
Purchase of current investments       (Rs. 30,000)

If current investments decrease, it usually suggests sale of investments.

Example:

Particulars	31 March 2025	31 March 2026
Current investments	Rs. 90,000	Rs. 60,000

Current investments decreased by Rs. 30,000.

Treatment:

Cash Flow from Investing Activities
Sale of current investments            Rs. 30,000

The Three-Step Decision Method

When you see bank overdraft, cash credit, or current investments, use this method.

Step 1: Read the Exact Wording

Look for phrases such as:

• included in cash and cash equivalents
• treated as cash equivalent
• repayable on demand
• part of cash management
• purchase of current investments
• sale of current investments
• cash credit from bank

These phrases decide the treatment.

Step 2: Decide the Nature

Ask:

Question	If answer is yes
Is it cash or cash equivalent?	Include it in opening or closing cash and cash equivalents
Is it borrowing from bank?	Show it under financing activities
Is it purchase or sale of investments?	Show it under investing activities

Step 3: Avoid Double Counting

This is the most important step.

If an item is included in cash and cash equivalents, do not show its movement separately in the main cash flow statement.

If an item is shown separately as financing or investing, do not also include it as cash and cash equivalents.

Quick Comparison Table

Item	Normal treatment	Inflow when	Outflow when
Bank overdraft	Financing, unless included in cash and cash equivalents	Overdraft increases	Overdraft decreases
Cash credit	Financing	Cash credit increases	Cash credit decreases
Current investments	Investing, unless treated as cash equivalent	Investments sold	Investments purchased
Current investments as cash equivalents	Included in cash and cash equivalents	Included in closing balance	Included in opening balance

This table is useful for revision, but do not use it mechanically. Always check the information given in the question.

Solved Example 1: Bank Overdraft as Financing Activity

Balance sheet extract:

Particulars	31 March 2025	31 March 2026
Bank overdraft	Rs. 35,000	Rs. 15,000

Bank overdraft decreased by Rs. 20,000.

This means the business repaid part of the overdraft.

Treatment:

Cash Flow from Financing Activities
Repayment of bank overdraft           (Rs. 20,000)

Do not add this to operating activities as a current liability adjustment. It is a bank borrowing item, not a trade liability.

Solved Example 2: Cash Credit Increased During the Year

Balance sheet extract:

Particulars	31 March 2025	31 March 2026
Cash credit	Rs. 70,000	Rs. 1,10,000

Cash credit increased by Rs. 40,000.

The business raised more funds through bank borrowing.

Treatment:

Cash Flow from Financing Activities
Increase in cash credit                Rs. 40,000

This is not operating activity, even if the money was used for day-to-day business needs.

Solved Example 3: Current Investments as Cash Equivalents

Balance sheet extract:

Particulars	31 March 2025	31 March 2026
Cash in hand	Rs. 10,000	Rs. 15,000
Bank balance	Rs. 40,000	Rs. 55,000
Current investments treated as cash equivalents	Rs. 25,000	Rs. 30,000

Opening cash and cash equivalents:

Rs. 10,000 + Rs. 40,000 + Rs. 25,000 = Rs. 75,000

Closing cash and cash equivalents:

Rs. 15,000 + Rs. 55,000 + Rs. 30,000 = Rs. 1,00,000

Net increase:

Rs. 1,00,000 - Rs. 75,000 = Rs. 25,000

There is no separate investing activity for current investments because the question has treated them as cash equivalents.

Solved Example 4: Current Investments Not Treated as Cash Equivalents

Balance sheet extract:

Particulars	31 March 2025	31 March 2026
Current investments	Rs. 40,000	Rs. 75,000

No information says that these investments are cash equivalents.

So the increase of Rs. 35,000 is treated as purchase of current investments.

Treatment:

Cash Flow from Investing Activities
Purchase of current investments       (Rs. 35,000)

Do not include these current investments in cash and cash equivalents unless the question supports it.

Solved Example 5: Mixed Question

Balance sheet extract:

Particulars	31 March 2025	31 March 2026
Cash at bank	Rs. 50,000	Rs. 65,000
Bank overdraft	Rs. 20,000	Rs. 30,000
Cash credit	Rs. 90,000	Rs. 60,000
Current investments	Rs. 45,000	Rs. 70,000

Additional information:

Current investments are not treated as cash equivalents.

Bank overdraft is shown as a short-term borrowing.

Now classify each item.

Item	Movement	Treatment
Cash at bank	Increase of Rs. 15,000	Part of cash and cash equivalents
Bank overdraft	Increase of Rs. 10,000	Financing inflow
Cash credit	Decrease of Rs. 30,000	Financing outflow
Current investments	Increase of Rs. 25,000	Investing outflow

Final treatment:

Cash Flow from Investing Activities
Purchase of current investments       (Rs. 25,000)

Cash Flow from Financing Activities
Increase in bank overdraft             Rs. 10,000
Repayment of cash credit              (Rs. 30,000)
Net cash used in financing activities (Rs. 20,000)

Cash at bank will appear only in the cash and cash equivalents reconciliation at the end.

Common Mistakes to Avoid

Mistake 1: Treating Cash Credit as Operating Activity

Cash credit is related to working capital, but it is still a borrowing from the bank. Show its increase or decrease under financing activities.

Mistake 2: Including Every Current Investment in Cash Equivalents

Current investments are not automatically cash equivalents. They must be short-term, highly liquid, readily convertible into known cash, and low risk.

Mistake 3: Showing Cash Equivalent Movement Separately

If current investments are included in cash and cash equivalents, do not show their purchase or sale separately as investing activity.

Mistake 4: Double Counting Bank Overdraft

If bank overdraft is included in cash and cash equivalents, do not also show increase or decrease in bank overdraft under financing activities.

Mistake 5: Ignoring Additional Information

Additional information can override the normal assumption. If the question says a current investment was sold for a certain amount, use the sale proceeds. If it says bank overdraft is part of cash management, treat it accordingly.

A Simple Revision Shortcut

Before finalising the answer, write one small note in the margin:

BO: CCE or financing?
CC: financing?
Current investments: CCE or investing?

Then tick the correct treatment for each item.

This takes a few seconds, but it can save several marks.

Frequently Asked Questions

Is bank overdraft shown in financing activities?

Usually yes, if it is treated as a bank borrowing. An increase in bank overdraft is a financing inflow, and a decrease is a financing outflow. But if the question clearly includes bank overdraft in cash and cash equivalents, do not show it separately in financing activities.

Is cash credit shown in financing activities?

Yes. Cash credit is generally treated as borrowing from the bank. An increase is shown as a financing inflow, and a decrease is shown as repayment under financing activities.

Are current investments always cash equivalents?

No. Current investments are cash equivalents only when they are short-term, highly liquid, easily convertible into a known amount of cash, and carry very little risk of change in value. Otherwise, their purchase and sale are shown under investing activities.

If current investments are cash equivalents, do we show purchase of current investments?

No. If current investments are included in cash and cash equivalents, their movement is already included in the opening and closing cash and cash equivalents balance. Showing purchase or sale separately would double count the movement.

Is bank overdraft deducted from cash and cash equivalents?

It is deducted only when the question treats bank overdraft as part of cash and cash equivalents. For example, if cash at bank is Rs. 80,000 and bank overdraft included in cash management is Rs. 20,000, cash and cash equivalents would be Rs. 60,000.

Is cash credit deducted from cash and cash equivalents?

Generally no. Cash credit is normally shown as a borrowing and treated under financing activities. It is not usually deducted while calculating cash and cash equivalents.

What if the question gives no special instruction?

Use the most common treatment: cash credit as financing, current investments as investing unless they clearly qualify as cash equivalents, and bank overdraft as financing unless the question indicates it is part of cash and cash equivalents.

What is the safest way to avoid mistakes?

First mark whether the item is cash equivalent, borrowing, or investment. Then classify it. Do not start adding or subtracting numbers until the nature of the item is clear.