Question

When using the allowance​ method, the​ write-off of a receivable​ ________. A. involves a​ contra-revenue account B. affects the net realizable value of accounts receivable C. decreases net income D. reduces the amount of the Allowance for Bad Debts account

Answer 1

Answer:

B- affects the net realizable value of accounts receivable

Explanation:

The mechanics of the allowance method are that the initial entry is a debit to bad debt expense and a credit to the allowance for doubtful accounts (which increases the reserve). The allowance is a contra account, which means that it is paired with and offsets the accounts receivable account. When a specific bad debt is identified, the allowance for doubtful accounts is debited (which reduces the reserve) and the accounts receivable account is credited (which reduces the receivable asset). If a customer subsequently pays an invoice that has already been written off, then the process is reversed to increase both the allowance and the accounts receivable account, after which the cash account is debited to increase the cash balance and the accounts receivable account is credited to reduce the receivable asset.