Multiple Choice
In a company’s financial statements prepared under the allowance method, bad debt expense is reported on the income statement as which of the following?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Which one of the following is NOT an accurate description of the Allowance for Doubtful Accounts?
A
It represents the estimated amount of accounts receivable that may not be collected.
B
It is used to match bad debt expense to the period in which related sales are made.
C
It is reported as a liability on the balance sheet.
D
It is a contra-asset account that reduces accounts receivable on the balance sheet.
Verified step by step guidance1
Step 1: Understand the concept of Allowance for Doubtful Accounts. It is a contra-asset account used to estimate the portion of accounts receivable that may not be collected due to customers' inability to pay.
Step 2: Review the purpose of the Allowance for Doubtful Accounts. It helps match bad debt expense to the period in which the related sales are made, adhering to the matching principle in accounting.
Step 3: Analyze how the Allowance for Doubtful Accounts is reported on the balance sheet. It is not reported as a liability; instead, it is a contra-asset account that reduces the accounts receivable balance.
Step 4: Compare the descriptions provided in the problem. Identify which statement does not accurately describe the Allowance for Doubtful Accounts based on the explanation above.
Step 5: Conclude that the statement 'It is reported as a liability on the balance sheet' is incorrect because the Allowance for Doubtful Accounts is a contra-asset account, not a liability.
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