Better Days Ahead, a charitable organization, has a standing agreement with First National Bank.  The agreement allows Better Days Ahead to overdraw its cash balance at the bank when donations are running low. In the past, Better Days Ahead managed funds wisely and rarely used this privilege.

Jacob Henson has recently become the manager of Better Days. To expand operations, Henson acquired office equipment and spent large amounts on fundraising. During Henson's tenure, Better Days Ahead has maintained a negative bank balance of approximately $10,000.

  • What accounts do you see being affected as a result of Jacob Henson's actions?  Which accounts do you think would experience a debit? Which accounts do you think would experience a credit?
  • How would a negative bank balance be listed in a Trial Balance?
  • Is there an ethical issue in this situation?
  • Do you approve or disapprove of Jason Henson's management of Better Days Ahead's funds?
  • Expert Answers

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    With regards to your first question, Henson's actions would affect any and all accounts or assets associated with the bank withdraw—namely, the cash and the office equipment along with related categories such as bank loans and bank fees/expenses. These would be recorded as various debits and credits.

    As a rule, credits decrease a balance while debits increase it. Cash on hand, which is usually an asset, would likely be recorded as a credit since it is now a liability. Office equipment, on the other hand, although not liquid, is a tangible asset that the organization now holds and would be listed as a debit, with any depreciation listed in the credit column.

    Fundraising expenses would be accounts payable costs that would be credited while the donations earned would be debited receivables. Typically, the assets and liabilities of an organization are listed from most liquid to least. Bank fees and expenses would be another credit if the bank decides to charge the organization a fee for...

    (The entire section contains 2 answers and 735 words.)

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