Final answer:
Compensating balance agreements not legally restricting funds should be disclosed in the notes to the financial statements, while the balance sheet reflects the full funds.
Step-by-step explanation:
Compensating balance agreements that do not legally restrict the amount of funds shown on the balance sheet should be reported in the notes to the financial statements. The balance sheet, which sometimes is referred to as a T-account due to its two-column format with a T-shape formed by the vertical line down the middle and the horizontal line under "Assets" and "Liabilities", would still show the full amount of funds. However, the nature and requirements of the compensating balance agreements would be disclosed in the notes as additional information that is relevant for users of the financial statements.