Final answer:
To record an NSF check of $2,000 found during bank reconciliation, Largo Corp. would debit Accounts Receivable and credit Cash, reversing the original entry and reflecting that the cash was not received.
Step-by-step explanation:
When a company like Largo Corp. discovers a non-sufficient funds (NSF) check in its bank reconciliation, it signifies that a previously recorded increase in the cash account did not materialize due to the check bouncing. To rectify this discrepancy and accurately reflect the financial position, an adjusting entry is required.
The entry to record the NSF check involves debiting the Accounts Receivable account and crediting the Cash account. This entry effectively reverses the initial recording, acknowledging that the company did not receive the expected cash but still holds a legitimate receivable from the issuer of the NSF check. In this case, the entry would look like this:
- Debit Accounts Receivable $2,000
- Credit Cash $2,000
By debiting Accounts Receivable, Largo Corp. acknowledges that the funds expected from the NSF check are now an outstanding receivable rather than actual cash on hand. Simultaneously, crediting the Cash account reduces the cash balance, aligning it with the actual available funds.
This adjustment ensures the accuracy of Largo Corp.'s financial records by reflecting the true state of its cash position. It also maintains transparency in the company's financial reporting, providing a clear picture of both cash inflows and outstanding receivables, which is crucial for effective financial management and decision-making.