Multiple Choice
Under the allowance method, when is bad debt expense recorded?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Under the allowance method, when is bad debt expense recognized?
A
When cash is received from the customer
B
When a specific account is written off as uncollectible
C
In the same period as the related sales revenue is recognized
D
At the end of the fiscal year only if there are actual write-offs
Verified step by step guidance1
Understand the concept of the allowance method: The allowance method is used to estimate and record bad debt expense in the same period as the related sales revenue, adhering to the matching principle in accounting.
Review the matching principle: The matching principle states that expenses should be recognized in the same period as the revenues they help generate. This ensures accurate financial reporting.
Identify when bad debt expense is recognized: Under the allowance method, bad debt expense is recognized in the same period as the related sales revenue, not when cash is received, accounts are written off, or at the end of the fiscal year.
Clarify the process of estimating bad debt: Companies use historical data and other relevant information to estimate the amount of uncollectible accounts and record it as bad debt expense in the same period as the sales revenue.
Understand the journal entry: To record bad debt expense, the company debits 'Bad Debt Expense' and credits 'Allowance for Doubtful Accounts,' which is a contra-asset account reducing accounts receivable.
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