Final answer:
The Allowance for Doubtful Accounts is a contra asset account, not a liability. It is debited when accounts are written off and credited when bad debt expense is estimated, helping to provide an accurate representation of the realizable value of accounts receivable.
Step-by-step explanation:
Among the given choices regarding the Allowance for Doubtful Accounts, the statement that is not true is D. It is a liability account. The Allowance for Doubtful Accounts is in fact a contra asset account, not a liability. To clarify:
- A. It is a contra asset account. - This statement is true, as the allowance account is used to offset the total balance of accounts receivable to reflect the amount that is expected to be collected.
- B. It is used instead of reducing accounts receivable directly. - This is true because the allowance method records bad debt expenses without immediate adjustment to accounts receivable.
- C. It is debited when uncollectible accounts are written off. - This is true, as the actual uncollectible accounts are written off against the allowance account.
- D. It is a liability account. - This is false. It is, as mentioned, a contra asset account which reduces the value of accounts receivable.
- E. It is credited when bad debts expense is estimated and recorded. - This is true, when bad debt expense is recorded, the allowance account is credited as part of the adjusting entry.
Contra asset accounts like the Allowance for Doubtful Accounts are essential in accounting as they provide a more accurate representation of the value of assets, in this case, accounts receivable. Unlike a liability, which represents an obligation to pay, contra assets simply serve to reduce the carrying amount of the associated assets.