Question

The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. The entry to record the customer's NSF check will:_____.
a. increase the Accounts Receivable balance.
b. decrease the Cash account.
c. decrease equity.
d. increase the Accounts Receivable balance and decrease the Cash account balance.

Answer 1

Answer:

Option D is the correct answer.

d. increase the Accounts Receivable balance and decrease the Cash account balance.

Explanation:

A NSF check or a Non Sufficient Fund check is when a check is received from the customer for the amount owed by the customer and is recorded as bank debit and accounts receivable credit in the business's books but due to less balance in the customer's account, the payment is not received  by the business and the check needs to be returned to the customer and the entry needs to be reversed by the business.

The result of recording the NSF will be to increase the accounts receivables balance and decrease the cash balance because the original entry when the check was received was to reduce the accounts receivable balance and to increase the cash balance.