If the amount of bad debts expense is understated at year end, then
A)net income will be understated.
B)shareholders' equity will be understated.
C)Allowance for Doubtful Accounts will be overstated.
D)net Accounts Receivable will be overstated.

Question

Quizplus · Accepted Answer

When bad debts expense is understated, it means that not enough expense is recognized for accounts that are expected to be uncollectible. This results in the Allowance for Doubtful Accounts being too low, which in turn causes the net Accounts Receivable (Accounts Receivable minus Allowance for Doubtful Accounts) to be overstated, because insufficient amounts are being deducted for expected bad debts.

If the Amount of Bad Debts Expense Is Understated at Year