If a company uses the allowance method to account for bad debts, the company's owners' equity will decrease
A)at the end of the accounting period when an adjusting entry to estimate bad debts is recorded.
B)on the date a customer's account is determined to be uncollectible.
C)when the accounts receivable amount becomes past due.
D)on the date a customer's account is written off.

Question

Quizplus · Accepted Answer

With the allowance method, an adjusting entry is made at the end of the accounting period to estimate bad debts based on past experience and current economic conditions. This adjusting entry will decrease the company's owners' equity by reducing the amount of accounts receivable that are expected to be collected in the future. Option B is incorrect because the determination of a customer's account being uncollectible is a separate event that does not directly affect owners' equity. Option C is incorrect because the accounts receivable becoming past due does not necessarily mean they will become uncollectible; it depends on the individual circumstances of each customer. Option D is incorrect because writing off a customer's account only affects the specific customer's balance, not the overall owners' equity of the company.

If a Company Uses the Allowance Method to Account for Bad