Multiple Choice
In the net accounts receivable method, what does a debit balance in the Allowance for Doubtful Accounts most likely indicate?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
In a company’s financial statements prepared under the allowance method, bad debt expense is reported on the income statement as which of the following?
A
A liability reported as Allowance for Doubtful Accounts
B
A financing expense reported below operating income
C
A selling and administrative expense (operating expense)
D
A contra-asset that reduces Accounts Receivable
Verified step by step guidance1
Understand that under the allowance method, bad debt expense represents the estimated uncollectible accounts receivable for the period and is recognized as an expense in the income statement.
Recall that bad debt expense is classified as an operating expense because it relates to the normal business operations of selling goods or services on credit.
Recognize that bad debt expense is reported as a selling and administrative expense, which is a subset of operating expenses on the income statement.
Differentiate bad debt expense from the Allowance for Doubtful Accounts, which is a contra-asset account on the balance sheet that reduces Accounts Receivable, not an expense on the income statement.
Conclude that bad debt expense is not a liability or a financing expense, but specifically a selling and administrative expense (operating expense) on the income statement.
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