Final answer:
The correct adjusting entry for an NSF check notification is to debit Accounts Receivable and credit Cash. This reflects that the cash is now an outstanding customer debt. Deposits to a bank create liabilities for the bank, while issued loans become assets.
Step-by-step explanation:
When a bank notifies a company that a deposited check was returned due to non-sufficient funds (NSF), the company must make an adjustment to its accounting records. The correct adjusting entry requires the company to debit Accounts Receivable and credit Cash, reflecting that the expected cash is not available, and instead, the amount is now owed by the customer again. This is an example of a company managing its accounts receivable following an NSF check notification.
With reference to the provided scenarios around bank deposits and loans, banks view deposits as liabilities because they must be repaid to customers upon request. Similarly, when banks issue loans, like the one Singleton Bank provides to Hank's Auto Supply, it’s recorded as an asset, anticipating interest income later on. First National, upon receiving Hank's deposit, increases its reserves by the same amount and holds a fraction (10%) as required reserves while being free to loan out the rest.