Question

Under the allowance method for estimating uncollectible accounts, the entry to write off an account:

A) reduces total assets

B) reduces net income

C) has no effect on total assets

D) increases net income

Why is the answers c)

I dont not understand since a write off would credit account receivable ( assets) and debit allowance of doubtful account.

Answer 1

Correct answer------------C) has no effect on total assets

Explanation

The effect on asset is zero because the accounts receivable is an asset but allowance for doubtful accounts is Contra asset .

Allowance for doubtful account decrease accounts receivable balance to get net accounts receivable. When accounts receivable is written off then gross receivable is credited and allowance is debited. The net accounts receivable before and after remains same. When allowance for doubtful account is debited its balance decrease.

Lets take an example . Suppose accounts receivable (gross) are 50000 and allowance for doubtful accounts are 5000 (cr) and assume 1000 worth of accounts receivable are written off.

	Before Write off of $1000 of Accounts receivable	Write off of 1000	After Write off of $1000 of Accounts receivable
Accounts receivable (gross)	$           50,000.00	$           (1,000.00)	$           49,000.00
Allowance for doubtful account.	$           (5,000.00)	$             1,000.00	$           (4,000.00)
Accounst receivable(net)	$           45,000.00		$           45,000.00