Final answer:
The Allowance for Uncollectible Accounts is a contra-asset account that has a credit balance and is offset against the accounts receivable to reflect the estimated uncollected amount. It follows accrual accounting principles and is used in journal entries to record anticipated losses from uncollected receivables.
Option 'b' is the correct.
Step-by-step explanation:
The Allowance for Uncollectible Accounts has a credit balance because it is a contra-asset account. This type of account offsets the balance of an associated account.
In the world of accounting, assets typically have a debit balance. When a business estimates that some of its receivables will not be collected, it uses the Allowance for Uncollectible Accounts to anticipate the loss and present a more accurate value of the receivables on the balance sheet.
The recording of the allowance follows the principles of accrual accounting, where expenses and revenues are recorded when they are incurred, not necessarily when cash is exchanged. The entry to record the estimated uncollectible accounts would be a debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts, reflecting the expense of potential non-payments and reducing the value of gross receivables respectively.
Example of Allowance for Uncollectible Accounts
Let's say Company X has $100,000 in accounts receivable. After analysis, the company estimates that 5% of this amount will not be collected. The entry would be:
This would mean the net accounts receivable that the company expects to collect is reduced to $95,000. The Allowance for Uncollectible Accounts serves to align the company's books with this expectation.