Question

when using the allowance method, how does writing off a past-due account affect the total assets and net income of the business? a. decreases total asset, no effect on net income b. decreases net income, no effect on total assets c. decreases total assets and net income d. has no effect on either total assets nor net income

Answer 1

Writing off a past-due account via the allowance method decreases total assets due to a reduction in accounts receivable, but it does not affect the net income because the expense was already accounted for when the allowance for doubtful accounts was established. Therefore, the correct option is A.

Step-by-step explanation:

When using the allowance method to account for uncollectible accounts, writing off a past-due account affects the financial statements in a specific way. Writing off the account will decrease total assets, specifically the accounts receivable on the balance sheet, as the company is acknowledging that the amount will not be collected.

However, it has no effect on net income because the expense was already recognized when the allowance for doubtful accounts was created. This is based on the matching principle in accrual accounting which states that expenses should be recorded in the period they are incurred, not necessarily when they are paid. Therefore, the correct answer is a) decreases total assets, no effect on net income.