A compensating balance refers to:
A) The minimum balance established for a petty cash fund
B) A minimum balance that a financial institution requires a firm to maintain in its account as part of a borrowing arrangement
C) The final cash balance achieved in a bank reconciliation
D) The amount of cash invested temporarily in highly marketable securities
E) None of the above

Question

Quizplus · Accepted Answer

A compensating balance is a minimum balance that a bank requires a borrower to maintain in an account as part of a loan agreement. This balance is not directly available for the company's use but serves as a form of security for the bank.

A Compensating Balance Refers To