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A Compensating Balance Restricts Cash; in Effect,it Increases the Interest

question 170

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A compensating balance restricts cash; in effect,it increases the interest on the loan and reduces a company's liquidity.


Definitions:

Contra Account

An account used in conjunction with another account to adjust or offset its balance.

Allowance Account

An account set aside to cover potential losses from doubtful accounts, reflecting estimated uncollectible receivables.

Statement of Financial Position

A financial report detailing a company's assets, liabilities, and equity at a specific point in time, commonly known as a balance sheet.

Dishonoured Note

A promissory note that has not been paid by the issuer at its maturity date.

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