A company using the allowance method of accounting for bad debts has already set up an allowance for doubtful accounts. It now decides that one particular balance, for customer X, of $300, is uncollectible. The appropriate way to "write off" this item is:
A) Record bad debt of expense $300, and reduce accounts receivable by $300
B) Reduce sales by $300 and reduce accounts receivable by $300
C) Reduce the allowance for doubtful accounts by $300 and increase bad debt expense by $300
D) Reduce the allowance for doubtful accounts by $300 and decrease accounts receivable by $300

Question

Quizplus · Accepted Answer

The appropriate way to write off an uncollectible account under the allowance method is to reduce the allowance for doubtful accounts by the amount of the uncollectible account and decrease accounts receivable by the same amount. This reflects that the company has already anticipated a certain level of uncollectible accounts through the allowance, and now the specific uncollectible account is being removed from accounts receivable. Therefore, the correct choice is to reduce the allowance for doubtful accounts by $300 and decrease accounts receivable by $300, which is option D. Option A is incorrect because bad debt expense is already accounted for in the allowance for doubtful accounts, and reducing accounts receivable twice would overstate the company's financial position by $300. Option B is incorrect because reducing sales would not reflect the uncollectibility of the account; it would only decrease revenue. Option C is incorrect because reducing the allowance and increasing bad debt expense would overstate the amount of uncollectible accounts.

A Company Using the Allowance Method of Accounting for Bad