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Better Days Ahead and Their Negative Cash Balance

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?

Solution Preview

The cash account (bank account) is the main account affected. Current assets on the balance sheet will show a negative bank balance of $10,000. Keep in mind that the account balance on the balance sheet is not always truly reflective of the actual bank balance because of the time delay in writing a check. If the president of the company went to Store X and wrote a check for $2,000 for office equipment, that check would be entered in a reasonable amount of time into the ledger as a debit to office furniture and a credit to cash/the bank account. The ledger will show $2,000 less even though it has not yet been drafted by the payee from the payer's bank account. In ...

Solution Summary

This solution answers each of the questions presented in the Better Days Ahead accounting scenario. The accounts, debits, credits, trial balance, effects, and ethics involved are all thoroughly discussed.

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