Final answer:
The statement that the Allowance for Doubtful Debts is closed to the Income Summary at the end of the financial year is false. This account remains on the balance sheet and is adjusted but not closed, with the bad debt expense instead affecting the Income Summary.
Step-by-step explanation:
The Allowance for Doubtful Debts is not closed to the Income Summary at the end of the financial year. Instead, the Allowance for Doubtful Debts is a contra asset account linked to Accounts Receivable; it is used to estimate the amount of receivables that a company does not expect to actually collect. This account adjusts the value of Accounts Receivable to reflect a more accurate value on the balance sheet.
At the end of the financial year, bad debt expense (representing the estimate of the uncollectible accounts during the period) is recorded in the Income Summary. However, the Allowance for Doubtful Debts itself remains on the balance sheet and is adjusted, rather than closed. The ending balance of the Allowance for Doubtful Debts account will carry.