Multiple Choice
Which type of accounting is primarily concerned with tracking and reporting the specific amount of money that an individual must pay when insurance only covers a portion of costs?
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1. Introduction to Accounting
Types of Accounting
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Financial institutions charge a fee for an overdrawn account because _____.
A
the account holder has withdrawn more money than is available, creating a liability for the bank
B
the bank must pay taxes on overdrawn accounts
C
the account holder is required to pay interest on all deposits
D
overdrawn accounts increase the bank's profits automatically
Verified step by step guidance1
Understand the concept of an overdrawn account: An overdrawn account occurs when the account holder withdraws more money than is available in their account, resulting in a negative balance.
Recognize the implications for the bank: When an account is overdrawn, the bank essentially lends money to the account holder to cover the deficit, creating a liability for the bank.
Analyze the options provided: Evaluate each option to determine which aligns with the concept of an overdrawn account and the bank's response to it.
Option 1: 'The account holder has withdrawn more money than is available, creating a liability for the bank'—this accurately describes the situation and the reason for the fee.
Conclude that the fee is charged to compensate the bank for the risk and administrative costs associated with covering the negative balance, as described in Option 1.
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