Multiple Choice
Under the allowance method, how is net accounts receivable calculated on the balance sheet as of December 31?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
When recording the estimated uncollectible accounts using the allowance method, which of the following best describes the effect on the Allowance for Doubtful Accounts?
A
A credit to a contra-asset account
B
A debit to an expense account
C
A credit to a liability account
D
A debit to a revenue account
Verified step by step guidance1
Understand the allowance method: The allowance method is used to estimate and record uncollectible accounts receivable. It involves creating an Allowance for Doubtful Accounts, which is a contra-asset account that reduces the total accounts receivable on the balance sheet.
Identify the correct account type: The Allowance for Doubtful Accounts is a contra-asset account, meaning it offsets the value of a related asset account (Accounts Receivable). It is not a liability, expense, or revenue account.
Determine the effect of recording estimated uncollectible accounts: When recording the estimated uncollectible accounts, the company increases the Allowance for Doubtful Accounts by crediting it. This reflects the anticipated reduction in collectible accounts receivable.
Understand the corresponding debit entry: The corresponding debit entry is made to Bad Debt Expense, which is an expense account. This recognizes the cost of uncollectible accounts in the income statement.
Summarize the journal entry: The journal entry for recording estimated uncollectible accounts involves debiting Bad Debt Expense and crediting the Allowance for Doubtful Accounts. This ensures proper financial statement presentation and adherence to the matching principle.
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