Question

A voluntary health and welfare organization would report the account Provision for Uncollectible Pledges as which of the following?

1) A liability
2) An asset
3) A revenue
4) An expense

Answer 1

A voluntary health and welfare organization reports the account Provision for Uncollectible Pledges as an expense. This account is a contra-asset that decreases the balance of pledges receivable, recognizing the cost of potential pledge losses.

Step-by-step explanation:

The account Provision for Uncollectible Pledges that a voluntary health and welfare organization reports is essentially an estimate of the pledges that the organization anticipates will not be collected. This account is considered to be a contra-asset account, which means it reduces the value of the asset account it is related to—in this case, the pledges receivable account. However, when categorizing it according to the main accounting elements, it should be classified as an expense. When the organization creates a provision for uncollectible pledges, it recognizes that not all pledges will result in actual cash inflows and thus, this provision is used to more accurately present the net realizable value of pledges.

A contra-asset account appears on the balance sheet and has a credit balance, which decreases the balance of pledges receivable. Therefore, it does not represent a liability, revenue, or an asset in a direct sense. Instead, it acknowledges the cost of potential pledge losses.

Answer 2

The Provision for Uncollectible Pledges would be reported as an expense.so the correct answer is option 4.

Step-by-step explanation:

The Provision for Uncollectible Pledges is an estimation made by the voluntary health and welfare organization to account for potential uncollectible pledges. It represents an expense incurred due to the likelihood that some pledged donations may not be collected in the future.

In financial accounting, expenses are recorded to reflect the costs or reductions in assets that occur in generating revenue. When a provision for uncollectible pledges is established, it directly impacts the organization's net income, reducing it by the estimated amount of uncollectible pledges. This aligns with the matching principle in accounting, where expenses are recognized in the same period as the revenue they help generate.

To calculate the Provision for Uncollectible Pledges, the organization might consider historical data, economic conditions, and other relevant factors to estimate the percentage of pledges that may become uncollectible. This estimation is then recorded as an expense on the income statement, reducing the organization's reported income for the period.

By reporting the Provision for Uncollectible Pledges as 4) an expense, the organization demonstrates transparency in its financial statements, providing a more accurate representation of its financial position and ensuring that pledged amounts are appropriately accounted for despite potential non-collection.