Question

How does bad debt affect assets, liabilities, and stockholder
equity

Answer 1

Bad debt can decrease assets, increase liabilities, and decrease stockholder equity.

Step-by-step explanation:

Bad debt can have an impact on assets, liabilities, and stockholder equity. Let's break it down:

1. Assets: Bad debt typically refers to accounts receivable that cannot be collected, which means the value of these assets decreases. For example, if a company has $10,000 in accounts receivable and $2,000 of that is considered bad debt, the company's assets would be reduced by $2,000.
2. Liabilities: If a company expects to collect a certain amount of accounts receivable but is unable to collect due to bad debt, it may have to recognize a bad debt expense. This expense increases liabilities since the company owes money to suppliers or lenders.
3. Stockholder Equity: Stockholder equity is the residual interest in the assets of a company after deducting liabilities. If bad debt leads to a decrease in assets and an increase in liabilities, stockholder equity will also decrease.