Multiple Choice
The cost of estimated accounts receivable that will not be collected is referred to as:
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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The entry to record the estimate for uncollectible accounts includes:
A
A debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts
B
A debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable
C
A debit to Allowance for Doubtful Accounts and a credit to Bad Debt Expense
D
A debit to Accounts Receivable and a credit to Bad Debt Expense
Verified step by step guidance1
Understand the concept of uncollectible accounts: When a company estimates that some of its accounts receivable will not be collected, it records this estimate as an expense in the current period. This is done to comply with the matching principle in accounting, which requires expenses to be recognized in the same period as the revenues they help generate.
Identify the accounts involved: The two key accounts used in this process are 'Bad Debt Expense' (an expense account) and 'Allowance for Doubtful Accounts' (a contra-asset account that reduces accounts receivable on the balance sheet).
Determine the journal entry: To record the estimate for uncollectible accounts, you need to debit 'Bad Debt Expense' to recognize the expense and credit 'Allowance for Doubtful Accounts' to create a reserve for the estimated uncollectible accounts.
Understand why other options are incorrect: For example, debiting 'Allowance for Doubtful Accounts' and crediting 'Accounts Receivable' is used when specific accounts are written off, not when estimating uncollectibles. Similarly, debiting 'Accounts Receivable' and crediting 'Bad Debt Expense' is not appropriate for this scenario.
Summarize the correct entry: The correct journal entry to record the estimate for uncollectible accounts is a debit to 'Bad Debt Expense' and a credit to 'Allowance for Doubtful Accounts'. This ensures that the expense is recognized in the income statement and the allowance is reflected on the balance sheet.
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