When evaluating the collectability of accounts receivable:
A)the Uncollectible-Account Expense is a contra account.
B)the Allowance for Uncollectible Accounts is an operating expense in the selling,general and administrative category.
C)the allowance method uses estimates developed from the company's collection experience.
D)the direct write-off method uses the Allowance for Uncollectible Accounts to record bad debts.

Question

Quizplus · Accepted Answer

The allowance method involves estimating and setting aside a portion of accounts receivable that are expected to be uncollectible based on the company's collection experience. This estimated amount is recorded as an allowance in the balance sheet and is used to offset any future bad debt expenses. The direct write-off method, on the other hand, does not involve estimating and setting aside an allowance but instead writes off uncollectible accounts as they become evident. The uncollectible account expense is not a contra account, as stated in option A, but is an operating expense. Option B is partially correct but incomplete, as the Allowance for Uncollectible Accounts is indeed an operating expense but is specifically classified as a contra asset account in the balance sheet.

When Evaluating the Collectability of Accounts Receivable