BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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total assets remain the same and stockholders’ equity remains the same
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total assets decrease and stockholders’ equity decreases
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total assets increase and stockholders’ equity decreases
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total liabilities increase and stockholders’ equity decreases
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Detailed explanation-1: -When the bad debt is charged it decreases the account receivable account amount, and account receivable is an asset that gets decreased. Due to charging it as an expense, shareholder’s equity also decreases. Thus, this option is correct.
Detailed explanation-2: -To use the allowance method, record bad debts as a contra asset account (an account that has a zero or negative balance) on your balance sheet. In this case, you would debit the bad debt expense and credit your allowance for bad debts.
Detailed explanation-3: -Answer and Explanation: When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when c. management estimates the amount of uncollectibles. Under the allowance method, the company will make estimates of the amount of bad debts incurred during the year.
Detailed explanation-4: -The allowance method of accounting for bad debts violates the matching principle. When using the allowance method bad debt expense is recorded when an individual customer defaults. Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.
Detailed explanation-5: -Using the allowance method for bad debts expense, the Allowance for Doubtful Accounts is decreased: When a specific customer account is written off.