Under the allowance method of accounting for uncollectible accounts, bad Debt Ex
ID: 2484097 • Letter: U
Question
Under the allowance method of accounting for uncollectible accounts,
bad Debt Expense is debited when a specific account is written off as uncollectible.
allowance for Doubtful Accounts is closed each year to Income Summary.
the cash realizable value of accounts receivable is greater before an account is written off than after it is written off.
the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
bad Debt Expense is debited when a specific account is written off as uncollectible.
Explanation / Answer
1.
False - Under the allowance method, if a specific customer's accounts receivable is identified as uncollectible, it is written off by removing the amount from Accounts Receivable. The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated bad debts expense.
2.
False
Nominal or temporary accounts are income statements accounts that are closed to Income Summary at the end of the reporting period.Real or permanent accounts are balance sheet accounts which have a continuous nature and accumulate data from period to period; such accounts are not closed at the end of the reporting period.
Allowance for Doubtfull accounts being real or permanent accounts are balance sheet accounts and are as of a certain date is not closed each year to income summary.
Cash realizable value of accounts receivable
Cash realizable value is greater before an account is written off and is not same in balance sheet after an account is written off.
Reporting the cash realizable value, also known as the net realizable value, of your accounts receivables prevents it from being overstated on the balance sheet. To calculate the cash realizable value, subtract the uncollectable amount from your gross accounts receivable. The allowance method has two different ways to calculate the cash realizable value: the percentage of sales basis and the percentage of receivables basis. The uncollectable amount varies depending on which method you use.
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