Question

Under the allowance method, if bad debt write-offs during the year exceed the allowance amount, the balance in Allowance for Uncollectible Accounts at year end prior to adjustment:

a) will be a debit
b) should be deducted from Accounts Receivable
c) will be zero
d) should be adjusted by debiting it to bring the balance back to zero

Answer 1

The balance in Allowance for Uncollectible Accounts before year-end adjustments would have a debit balance if bad debt write-offs exceed the beginning-of-year allowance amount, indicating an insufficient initial estimation. An adjustment would involve debiting Bad Debt Expense and crediting the allowance account to reestablish an adequate allowance balance.

Step-by-step explanation:

Under the allowance method for accounting for bad debts, if bad debt write-offs exceed the beginning-of-year allowance amount, the balance in the Allowance for Uncollectible Accounts before any year-end adjustments would generally have a debit balance. This situation occurs because the write-offs have reduced the allowance account beyond zero, indicating that the initial estimation of uncollectible accounts was insufficient. To correct this, an adjustment at the year-end is required, which typically involves recording an additional bad debt expense to increase the allowance account back to a level that is estimated to be adequate for covering future uncollectible accounts. This adjustment is done by debiting Bad Debt Expense and crediting Allowance for Uncollectible Accounts.