Question

On December 31, 2019 a company’s Accounts Receivable balance was $440,000. During the year the company recorded credit sales of $770,000 and cash collections of $820,000. In addition, the company wrote off $16,000 of accounts as uncollectible and reinstated and collected on an accounts receivable that was previously written off that totaled $3,000. The company uses the allowance method to account for its receivables.What is the effect of the accounting equation if the company fails to make the adjusting entry to record bad debt expense?

Answer 1

Answer: Option C - Assets are Overstated; No effects on liabilities: Equity is Overstated

Explanation:

When Bad debts are recorded, they will reduce the Accounts Receivable account because less money will be expected from debtors. Accounts Receivable is an asset account so it will be Overstated if bad debts are not recorded.

Equity will also be overstated because bad debts is an expense that is sent to the Income statement. If this expense is not deducted, the net income will be larger than it should be and when added to Equity it will overstate it.