Question

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?

Answer 1

Requirement 1

Mr. Henson’s growth of Better Days Ahead would upset the liabilities, expenses, assets, equity, and revenue accounts. Liabilities and expenses accounts would experience a credit. Assets, equity, and revenue accounts would have a debit.

Requirement 2

The negative balance would be logged as an overdraft inside the checking account and a debit in the Trial Balance.

Requirement 3

Everything depends on the bank’s determination for the overdraft clause. If the determination was to agree to them to overdraft due to development then Mr. Henson’s decisions/actions were ethical. If the bank’s intent was to allow the overdraft to arise during crisis situations, then I believe Mr. Henson is taking advantage of the bank and not practicing ethical behavior.

Requirment 4

If the bank gave consent to overdraft knowing that the company could deliver more income in the future, then I agree with Mr. Henson’s intrepid management style. If he is taking advantage of an agreement with the bank and the company then it’s incorrect.