Multiple Choice
Under the allowance method of accounting for uncollectible accounts, how is net accounts receivable reported on the balance sheet?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Using the allowance method, the entry to record a write-off of accounts receivable will include:
A
A debit to Cash and a credit to Allowance for Doubtful Accounts
B
A debit to Bad Debt Expense and a credit to Accounts Receivable
C
A debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable
D
A debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts
Verified step by step guidance1
Understand the allowance method: The allowance method is used to account for uncollectible accounts receivable by estimating bad debts in advance and recording them in the Allowance for Doubtful Accounts, a contra-asset account.
Recognize the purpose of a write-off: A write-off occurs when a specific account receivable is deemed uncollectible. The write-off reduces both the Accounts Receivable and the Allowance for Doubtful Accounts, reflecting the removal of the uncollectible amount from the company's books.
Identify the correct accounts: When writing off an account receivable, the Allowance for Doubtful Accounts is debited to reduce its balance, and Accounts Receivable is credited to remove the uncollectible amount from the company's receivables.
Understand why Cash and Bad Debt Expense are not involved: Cash is not debited because no payment is received, and Bad Debt Expense is not debited because the expense was already recognized when the allowance was created.
Record the journal entry: The journal entry for the write-off will include a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, ensuring the uncollectible amount is properly removed from the financial statements.
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