Multiple Choice
Using the allowance method, the entry to record a write-off of accounts receivable will include:
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
What does a debit balance in the Allowance for Doubtful Accounts before year-end adjustments most likely indicate?
A
Actual bad debts written off exceeded previous estimates.
B
The company overestimated its bad debts in prior periods.
C
All accounts receivable have been collected.
D
No bad debts have occurred during the period.
Verified step by step guidance1
Understand the role of the Allowance for Doubtful Accounts: This account is a contra-asset account used to estimate and record potential uncollectible accounts receivable. It is adjusted periodically to reflect expected bad debts.
Recognize the normal balance of the Allowance for Doubtful Accounts: Normally, this account has a credit balance because it reduces the Accounts Receivable balance on the balance sheet.
Interpret a debit balance in the Allowance for Doubtful Accounts: A debit balance indicates that the actual bad debts written off during the period exceeded the previous estimates recorded in the account.
Analyze the options provided: The correct interpretation aligns with the idea that actual bad debts written off were higher than the estimated amount, leading to a debit balance.
Conclude that the most likely explanation is: 'Actual bad debts written off exceeded previous estimates,' as this directly explains why the Allowance for Doubtful Accounts would have a debit balance before year-end adjustments.
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