When the allowance method of recognizing bad debts expense is used the entry to recognize that expense
A) increases net income.
B) decreases current assets.
C) has no effect on current assets.
D) has no effect on net income.

Question

Quizplus · Accepted Answer

The allowance method involves estimating the amount of uncollectible accounts receivable and creating a contra asset account (allowance for doubtful accounts) to reduce the value of accounts receivable. When bad debts expense is recognized, it is debited and the allowance for doubtful accounts is credited, reducing the value of accounts receivable (a current asset). This decreases current assets and has no effect on net income since the expense was already factored into the original sale.

When the Allowance Method of Recognizing Bad Debts Expense Is