Which of the following actions should be taken when a check is returned from the bank for non-sufficient funds (NSF)?

• A. Increase the cash balance in the company's books by the amount of the NSF check.
• B. No action is required since the bank will automatically adjust the balance.
• C. Decrease the cash balance in the company's books by the amount of the NSF check.
• D. Record the NSF check as a bank service charge.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a non-sufficient funds (NSF) check: An NSF check occurs when a check deposited by the company is returned by the bank because the payer's account does not have enough funds to cover the check amount.
2. Identify the impact of an NSF check on the company's books: Since the check amount was initially recorded as an increase in the company's cash balance, the returned check means the cash balance is overstated and needs to be reduced.
3. Determine the correct action: The company should decrease the cash balance in its books by the amount of the NSF check to reflect the accurate cash position.
4. Record the NSF check in the company's accounting records: Create a journal entry to decrease the cash account and record the NSF check amount in an appropriate account, such as 'Accounts Receivable,' if the payer still owes the money.
5. Review the bank reconciliation process: Ensure the NSF check is accounted for during the bank reconciliation to align the company's book balance with the bank statement balance.