The correct answer is Option (2) → Financing Activity
A bank overdraft is a loan repayable on demand by the bank, so in the Balance Sheet it is shown under short-term borrowings. Raising or repaying borrowings changes the borrowings of the enterprise, which makes it a financing activity.
Option (1) Operating Activity — Incorrect. Borrowing money is not a main revenue-producing activity.
Option (3) Investing Activity — Incorrect. Investing activities deal with buying and selling long-term assets and investments, not with borrowing.
Option (4) Non-cash Item — Incorrect. An overdraft is drawn and repaid in cash.
NCERT (2026-27 edition):
Cash from Financing Activities – “As the name suggests, financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise.” NCERT (2026-27 edition):
Borrowings – “Total borrowings are categorised into long-term borrowings, short-term borrowings and current maturities to long-term debt. Loans which are repayable in more than twelve months/operating cycle are classified as long-term borrowings on the face of balance sheet. Loans repayable on demand or whose original tenure is not more than twelve months/operating cycle are classified as short-term borrowings on the face of balance sheet.” |
