When a check is cashed, the check writer's bank ________ assets and ________ liabilities.

Question

BlackTom AI · Accepted Answer

Demand deposits are liabilities for a bank, and cash/reserves are assets, so when a check is cashed the bank’s deposit liability falls and its asset (cash or reserve balance) is used up.

1) Relevant knowledge points and concepts
- Bank balance sheet: Assets include cash on hand and reserve balances; liabilities include customer deposits (demand/checking accounts).  
- A check drawn on an account reduces the writer’s deposit (liability) and the bank pays out cash or transfers reserves to settle the obligation (reducing an asset).

2) Step-by-step reasoning
- Customer A (the check writer) has a $X balance in a demand deposit account at Bank A. That deposit appears on Bank A’s balance sheet as a liability of $X.  
- Customer A writes a check for $100. The payee cashes or deposits that check at another bank. To honor the check, Bank A must pay $100 out of its cash on hand or its reserve account at the central bank.  
- Payment reduces Bank A’s asset (cash/reserves) by $100 and simultaneously reduces the specific customer’s deposit by $100 (liability).

3) Calculation example (intermediate steps)
- Before: Assets: Reserves $10,000; Liabilities: Deposits $5,000 (including the writer’s $200 checkable deposit).  
- Check for $100 is cashed: Assets: Reserves $10,000 − $100 = $9,900. Liabilities: Deposits $5,000 − $100 = $4,900. Net effect: both assets and liabilities decrease by $100.

4) Why the correct answer is correct
- Both sides of the balance sheet change by the same amount: the bank “loses” an asset (cash/reserves) and the bank “loses” a liability (the customer’s deposit). That matches “loses; loses.”

5) Why other options are incorrect
- b (gains; loses): Assets do not increase when paying out a check.  
- c (gains; gains): Neither assets nor liabilities increase when a check is cashed.  
- d (loses; gains): Liabilities fall (deposit reduced), they do not increase.

Conclusion: The correct choice is a. loses; loses, which matches the provided answer.

When a check is cashed, the check writer's bank assets and liabilities.Single choice

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When a check is cashed, the check writer's bank ________ assets and ________ liabilities.Single choice