The allowance for doubtful accounts balance will not be a precise amount because of which of the following reasons?
A)It is an accounting estimate based upon judgment.
B)GAAP is not clear on the calculation of the allowance.
C)It is merely a reserve that is reversed by the client as income is needed for profitable results.
D)The precision is determined by the results of confirmation responses.

Question

Quizplus · Accepted Answer

The allowance for doubtful accounts balance is an estimate that requires judgment from the management. It is based on historical data, the company's credit policy, and the economic environment, making it an imprecise amount. GAAP provides guidance on how to calculate the allowance, making option B incorrect. Option C is not accurate because the allowance for doubtful accounts is a contra asset account that is used to offset accounts receivable on the balance sheet, not a reserve that is reversed as income is needed. Finally, option D is incorrect because the confirmation responses only provide evidence on the accuracy of the accounts receivable balance, not the allowance for doubtful accounts.

The Allowance for Doubtful Accounts Balance Will Not Be a Precise