Multiple Choice
The allowance for uncollectible accounts is a contra account to which of the following?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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When an account is written off using the allowance method, Accounts Receivable:
A
increases and Allowance for Doubtful Accounts increases by the same amount
B
decreases and Allowance for Doubtful Accounts decreases by the same amount
C
remains unchanged while Allowance for Doubtful Accounts decreases
D
decreases and Bad Debt Expense increases by the same amount
Verified step by step guidance1
Understand the allowance method: The allowance method is used to account for bad debts by estimating uncollectible accounts and recording them in the Allowance for Doubtful Accounts, which is a contra-asset account.
Recognize the impact of writing off an account: When an account is written off, it means the company has determined that a specific receivable will not be collected. This action affects both Accounts Receivable and the Allowance for Doubtful Accounts.
Analyze the journal entry for a write-off: The journal entry involves debiting the Allowance for Doubtful Accounts (to reduce it) and crediting Accounts Receivable (to remove the uncollectible amount from the books).
Understand why Bad Debt Expense is not affected: Bad Debt Expense is recorded when the allowance is initially estimated, not when specific accounts are written off. Therefore, writing off an account does not impact Bad Debt Expense.
Conclude the effects: Writing off an account decreases both Accounts Receivable and the Allowance for Doubtful Accounts by the same amount, leaving net receivables unchanged.
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