Multiple Choice
In the balance sheet, accounts receivable are normally reported at the:
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
What is the type of account and normal balance of the Allowance for Doubtful Accounts?
A
Contra-asset account with a credit balance
B
Asset account with a debit balance
C
Liability account with a credit balance
D
Revenue account with a credit balance
Verified step by step guidance1
Understand the concept of 'Allowance for Doubtful Accounts': This account is used to estimate the portion of accounts receivable that may not be collectible. It is a contra-asset account, meaning it reduces the value of a related asset account (Accounts Receivable).
Review the normal balance of a contra-asset account: Contra-asset accounts typically have a credit balance, which is opposite to the normal debit balance of asset accounts.
Analyze the options provided: The correct type of account and normal balance for 'Allowance for Doubtful Accounts' is a contra-asset account with a credit balance. This aligns with its purpose of offsetting the Accounts Receivable balance.
Eliminate incorrect options: An asset account with a debit balance is incorrect because 'Allowance for Doubtful Accounts' is not a regular asset account. A liability account with a credit balance is incorrect because this account does not represent a liability. A revenue account with a credit balance is incorrect because this account is not related to revenue.
Conclude the correct answer: Based on the analysis, the correct classification is 'Contra-asset account with a credit balance.' This reflects its role in financial accounting and its normal balance type.
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