Question

Under the allowance method, what is the effect on the accounting equation when an account receivable is deemed to be uncollectible and is written-off? a. Assets: Decrease, Liabilities: No Effect, Stockholders Equity: Decrease b. Assets: No Effect, Liabilities: Increase, Stockholders Equity: Decrease c. Assets: Decrease, Liabilities: No Effect, Stockholders Equity: Increase d. Assets: No Effect, Liabilities: No Effect, Stockholders Equity: No Effect

Answer 1

Answer:

D - Assets: No Effect, Liabilities: No Effect, Stockholders Equity: No Effect

Explanation:

According to the ALLOWANCE METHOD, when an account receivable is written off as uncollectible, the record is: Debit on Allowance for Doubtful Accounts and credit on Accounts Receivable for the same amount. Allowance for Doubtful Accounts has credit balance, because is a contra-asset account, and Accounts Receivable has debit balance so the accounting entry has no effect on the total amount of asset and don´t affect the others components of the financial statements. The expense was recorded when the Allowance for Doubtful Accounts was recognized against Bad Debts Expense at the end of the previous accounting period.