Multiple Choice
Under the allowance method, the write-off of accounts receivable:
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Under the allowance method, what is the effect on net accounts receivable when an uncollectible account is written off?
A
Net accounts receivable increases.
B
Net accounts receivable decreases.
C
Allowance for doubtful accounts increases.
D
Net accounts receivable remains unchanged.
Verified step by step guidance1
Understand the allowance method: Under this method, businesses estimate uncollectible accounts and record them as an expense in advance, creating an 'Allowance for Doubtful Accounts' contra-asset account.
Recognize the relationship between accounts receivable and the allowance account: The net accounts receivable is calculated as 'Accounts Receivable - Allowance for Doubtful Accounts'.
Analyze the write-off process: When an uncollectible account is written off, the business reduces both 'Accounts Receivable' and 'Allowance for Doubtful Accounts' by the same amount.
Evaluate the impact on net accounts receivable: Since both 'Accounts Receivable' and 'Allowance for Doubtful Accounts' decrease equally, the net accounts receivable ('Accounts Receivable - Allowance for Doubtful Accounts') remains unchanged.
Conclude: Writing off an uncollectible account does not affect the net accounts receivable because the reduction in accounts receivable is offset by the reduction in the allowance account.
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