What are the effects on the accounting equation when a company makes the adjustment to record bad debt expense using the allowance method?
A) Assets and owners' equity increase.
B) Assets and owners' equity decrease.
C) Assets increase and owners' equity decreases.
D) Assets decrease and owners' equity increases.

Question

Quizplus · Accepted Answer

When a company records bad debt expense using the allowance method, it increases the allowance for doubtful accounts (a contra asset account) and records bad debt expense, which decreases net income and, consequently, owners' equity. The overall effect is a decrease in assets (due to the increase in the allowance for doubtful accounts) and a decrease in owners' equity (due to the decrease in net income).

What Are the Effects on the Accounting Equation When a Company