Multiple Choice
On January 8th, your account was charged $30.00 for an overdraft fee. What is the most likely reason for this charge under the direct write-off method in accounting?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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When using the direct write-off method, writing off a customer's account as uncollectible reduces the balance of which account?
A
Sales Revenue
B
Allowance for Doubtful Accounts
C
Accounts Receivable
D
Bad Debt Expense
Verified step by step guidance1
Understand the direct write-off method: This method is used to account for uncollectible accounts by directly removing the amount from Accounts Receivable when it is determined that a customer will not pay.
Identify the accounts involved: The direct write-off method affects two accounts—Accounts Receivable and Bad Debt Expense. Accounts Receivable is reduced, and Bad Debt Expense is increased.
Recognize the impact on Accounts Receivable: When a customer's account is written off as uncollectible, the balance of Accounts Receivable decreases because the amount owed by the customer is no longer expected to be collected.
Understand why other accounts are not affected: Sales Revenue is not impacted because the write-off does not relate to new sales. The Allowance for Doubtful Accounts is not used in the direct write-off method; it is part of the allowance method instead.
Record the journal entry: To write off the uncollectible account, debit Bad Debt Expense (to recognize the expense) and credit Accounts Receivable (to reduce the balance of the customer's account).
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