Assuming that the allowance for doubtful debts method of accounting for bad debts is used, when a customer's account is determined to be a bad debt, which of the following will occur?
A) Bad debts expense is increased, allowance for doubtful debts is decreased.
B) Allowance for doubtful debts is reduced, accounts receivable is reduced.
C) Allowance for doubtful debts is reduced, bad debts expense is reduced.
D) Allowance for doubtful debts is reduced, accounts payable is increased.

Question

Quizplus · Accepted Answer

When a customer's account is determined to be a bad debt, the allowance for doubtful debts is reduced, as it was originally set up as a reserve for such situations. Additionally, the accounts receivable balance is reduced to reflect the fact that the customer is unlikely to pay their debt. Therefore, choice B is the correct answer.

Assuming That the Allowance for Doubtful Debts Method of Accounting