Final answer:
The financial statement effects template for bad debt mainly involves the Income Statement, where Bad Debt Expense is recorded, and the Balance Sheet, where Allowance for Doubtful Accounts is increased. There's no immediate impact on the Statement of Cash Flows, but there is an indirect effect on the Statement of Retained Earnings through reduced net income.
Step-by-step explanation:
The "financial statement effects template" for bad debt involves adjustments primarily to two key financial statements: the Income Statement and the Balance Sheet. When a company estimates bad debt, it uses either the allowance method or the direct write-off method. Both methods affect how transactions are recorded on these financial statements.
Income Statement
Under the allowance method, a company will estimate uncollectible accounts and record an expense called "Bad Debt Expense" or "Doubtful Accounts Expense". This reduces net income on the Income Statement.
Balance Sheet
The corresponding entry on the Balance Sheet is an increase to the "Allowance for Doubtful Accounts" under current assets, which is a contra-asset account that reduces the net value of accounts receivable. When a specific account is deemed uncollectible under the direct write-off method, it leads to the reduction of both the accounts receivable on the asset side and the company's net income.
Statement of Cash Flows
While bad debt affects the Income Statement and Balance Sheet, there is generally no immediate impact on the Statement of Cash Flows because bad debts are a non-cash expense.
Statement of Retained Earnings
Since net income is reduced due to the Bad Debt Expense, there is also an indirect effect on the Statement of Retained Earnings, as it will show a decrease in retained earnings due to the lower net income carried over from the Income Statement.