How can a firm operate with a negative cash balance on its corporate books?

Answer 1

Hi .... To ans to ur question, I would like to giv u one example.. If Company X issue cheques for more than its bank balance and sends them to its vendors. When the cheques get back to Company X's after checking its account, at that time Company X's bank will have two options when Company X's checking account does have not sufficient funds to cover the cheques: 1. The bank could pay the cheques and allow Company X's checking account to be overdrawn. (Some call this an unauthorized loan by the bank.) Company X then has the obligation or liability to repay the bank for the courtesy extended to Company X. 2. If Company X's bank does not pay the cheques because the account has insufficient funds, the bank will return the cheques as NSF (not sufficient funds). These cheques are returned throught the banking system and eventually the bank of the payee will take the amount of the cheques from the payee's checking account. The payee will in turn reinstate the liability amount owed to it by Company X. In essence Company X did not eliminate its liability to the payee by issuing a worthless cheques...........