Question

How does the year-end adjusting entry to recognize uncollectible accounts expense affect the elements of the financial statements? Multiple Choice Decrease total assets and decrease stockholders’ equity. Increase total assets and decrease stockholders’ equity. Increase total liabilities and increase stockholders’ equity. Decrease total liabilities and increase stockholders’ equity.

Answer 1

Answer: Decrease total assets and decrease stockholders’ equity.

Explanation:

Adjustment of uncollectable accounts at the year end will increase the bad debt expense which has to be taken from the net income this reducing it. This has the impact of reducing Shareholder Equity as Net Income is a component of that.

The Allowance for Uncollectebles Account also increases which has the effect of reducing the Accounts Receivables Account's carrying value thus reducing Assets as a whole.