Question

Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?

A) Decrease assets and decrease liabilities.
B) Increase liabilities and decrease stockholders' equity.
C) Increase assets and decrease stockholders' equity.
D) Decrease assets and decrease stockholders' equity.

Answer 1

Recording the estimate of uncollectible accounts decreases assets and stockholders' equity in Shupe Inc.'s accounting equation.

Step-by-step explanation:

When Shupe Inc. records the estimate of uncollectible accounts based on the percentage of accounts receivable, it affects the accounting equation by decreasing assets and stockholders' equity. This is represented on the T-account by debiting the allowance for doubtful accounts (which increases the contra asset on the left side of the T-account, indirectly decreasing total assets) and crediting bad debt expense (which decreases net income on the right side of the T-account, ultimately decreasing stockholders' equity). Thus, the correct answer to the question is D) Decrease assets and decrease stockholders' equity.