Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?Multiple choice question.The Allowance for Doubtful Accounts had an unadjusted debit balance.The both will always be the same amounts on the income statement and balance sheet.The Allowance for Doubtful Accounts had an unadjusted credit balance.
Question
Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?Multiple choice question.The Allowance for Doubtful Accounts had an unadjusted debit balance.The both will always be the same amounts on the income statement and balance sheet.The Allowance for Doubtful Accounts had an unadjusted credit balance.
Solution
The Bad Debt Expense on the income statement may be less than the Allowance for Doubtful Accounts on the balance sheet because the Allowance for Doubtful Accounts had an unadjusted credit balance.
Here's why:
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The Bad Debt Expense is an estimate of the amount of receivables that will not be collected and is recorded on the income statement. It is an expense because it reduces net income.
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The Allowance for Doubtful Accounts is a contra asset account on the balance sheet that reduces the total receivables reported to reflect only the amounts expected to be collected.
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The balance in the Allowance for Doubtful Accounts can be larger than the Bad Debt Expense for a period if there were amounts from prior periods that were estimated to be uncollectible but have not yet been written off.
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When a company writes off an account, it reduces the balance in Accounts Receivable but also reduces the balance in the Allowance for Doubtful Accounts. If the write-offs are less than the amounts estimated to be uncollectible, the balance in the Allowance for Doubtful Accounts will be larger than the Bad Debt Expense for the period.
So, the correct answer is "The Allowance for Doubtful Accounts had an unadjusted credit balance."
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