The Documentation with the bank statement shows a debit memo for bank services charges. Based on this what would be the effect of this transaction on the accounting equation?

 

1. Increase Miscellaneous Administrative expense; decrease cash

 

2. Increase cash; increase other income

 

3. Increase cash; increase Account payable

 

4. Decrease accounts payable; decrease cash

 

1)Increases miscellaneous expenses and also reduces cash. Bank service charges are debited with the bank's statement because to the bank, it is earned revenue hence a current asset in the bank's statement of financial position.

Step-by-step explanation

To the business, bank charges reduce cash account as it is the cost incurred on maintaining an account with the bank hence a payable that should be credited in the statement of financial position under the current liabilities. 

To understand this concept as to bank debits and credits, consider loans and deposits. When a customer deposits cash in the bank, it is debited as an asset on the balance sheet. The bank credits it as a liability since it must pay the money to the customer on demand. Thus customer deposits are liabilities to the bank. When loans are advanced to customers, a customer recognizes as a liability and credits in his/her balance sheet. The bank recognizes the advanced loan as an asset.