Multiple Choice
What does a debit balance in the Allowance for Doubtful Accounts before year-end adjustments most likely indicate?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
In the net accounts receivable method, what does a debit balance in the Allowance for Doubtful Accounts most likely indicate?
A
The company failed to record credit sales, causing Accounts Receivable to be overstated.
B
The company has overestimated uncollectible accounts, indicating the allowance is overstated.
C
Actual write-offs have exceeded prior estimates of uncollectible accounts, indicating the allowance is understated.
D
The company recorded cash collections as write-offs, causing Accounts Receivable to be understated.
Verified step by step guidance1
Understand that the Allowance for Doubtful Accounts is a contra-asset account used to estimate and record the amount of accounts receivable that may not be collectible.
Recognize that normally, the Allowance for Doubtful Accounts has a credit balance, which reduces the total Accounts Receivable to its net realizable value.
A debit balance in the Allowance for Doubtful Accounts means that the actual write-offs of uncollectible accounts have exceeded the estimated amount previously recorded in the allowance.
This situation indicates that the company underestimated the uncollectible accounts, causing the allowance to be understated rather than overstated.
Therefore, a debit balance signals that the company needs to increase the allowance to properly reflect the expected uncollectible accounts.
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