Final answer:
When someone files for bankruptcy and cannot pay a company, the company credits the Allowance for Doubtful Accounts, reducing accounts receivable. Bankruptcy allows companies to restructure debts rather than liquidate.
Step-by-step explanation:
When a company is owed money by a debtor who files for bankruptcy, the account that the company will credit, acknowledging they won't collect the receivable, is typically named Allowance for Doubtful Accounts or a similar variation. This is a contra-asset account that reduces the total amount of accounts receivable on the balance sheet. Essentially, it's a reserve for debts that the company does not expect to collect. When the company determines that the amount is uncollectible due to the debtor's bankruptcy, they will credit this allowance account and debit the accounts receivable account, reflecting the write-off of the debt.
Considering the bankruptcy process, companies often continue to operate because filing for bankruptcy protection allows them to restructure their debts and continue their business operations while paying off creditors over time under a court-approved plan. This can be preferable to liquidation, which involves ceasing operations and selling off assets.