What type of adjustment is used to cancel an NSF payment?

What type of adjustment is used to cancel an NSF payment?

• A. Credit Adjustment
• B. Debit Adjustment
• C. Reversal
• D. Offsetting Entry

Answer: (B)

When a payment is NSF, you need to undo the cash receipt that was recorded and restore what the customer owes. This is done by making a debit adjustment to the customer's accounts receivable. Debiting AR increases the AR balance, reflecting that the payment did not actually clear and the receivable is still outstanding. The cash entry that was previously recorded is offset by this adjustment, effectively canceling the NSF effect. A credit adjustment would reduce the accounts receivable, which is the opposite of what you need because the customer still owes the amount. A reversal can undo the original entry, but the specific action described in many systems for NSF cancellations is a debit adjustment. An offsetting entry isn’t the standard remedy for this situation.

When a payment is NSF, you need to undo the cash receipt that was recorded and restore what the customer owes. This is done by making a debit adjustment to the customer's accounts receivable. Debiting AR increases the AR balance, reflecting that the payment did not actually clear and the receivable is still outstanding. The cash entry that was previously recorded is offset by this adjustment, effectively canceling the NSF effect.

A credit adjustment would reduce the accounts receivable, which is the opposite of what you need because the customer still owes the amount. A reversal can undo the original entry, but the specific action described in many systems for NSF cancellations is a debit adjustment. An offsetting entry isn’t the standard remedy for this situation.