How is a customer's NSF (non-sufficient funds) check reflected on a bank reconciliation?

• A. It is subtracted from the bank balance.
• B. It is added to the book balance.
• C. It is added to the bank balance.
• D. It is subtracted from the book balance.

Answer: (D)

Verified step by step guidance

1. Understand the concept of NSF (non-sufficient funds) checks: An NSF check is a check that a customer has written but cannot be processed due to insufficient funds in their account. This means the check is essentially 'bounced' and the amount cannot be collected.
2. Recognize the impact on the company's books: When a company receives an NSF check, it initially records the check as a deposit, increasing the book balance. However, once the bank informs the company that the check has bounced, the company must reverse this deposit.
3. Determine the adjustment required: Since the NSF check was initially added to the book balance, the reversal requires subtracting the amount of the NSF check from the book balance to reflect the accurate financial position.
4. Understand why it does not affect the bank balance: The NSF check is a transaction between the customer and the company, not the bank. Therefore, it does not impact the bank balance directly but requires an adjustment in the company's books.
5. Apply the adjustment during bank reconciliation: During the reconciliation process, subtract the NSF check amount from the book balance to ensure the company's records align with the bank statement.