Question

Gibbs Co. uses the allowance method for recognizing uncollectible accounts. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account.

a. Affects neither net income nor working capital.
b. Affects neither net income nor accounts receivable
c. Decrease both new income and accounts receivable.
d. Decreases both net income and working capital.

Answer 1

When a company writes off a specific uncollectible account under the allowance method, it affects neither net income nor working capital because the loss has already been estimated and accounted for in the allowance for doubtful accounts. The correct option is A.

Step-by-step explanation:

The question pertains to how the write-off of an uncollectible account is accounted for under the allowance method in accounting. According to this method, when a specific account is deemed uncollectible and is written off, the entry to write off the account has the following impact:

• The allowance for doubtful accounts (a contra-asset account) is reduced by the amount of the write-off.
• The accounts receivable is reduced by the same amount.

Because the allowance for doubtful accounts has already estimated potential losses from uncollectibles, the actual write-off does not affect the current period’s net income.

The write-off also doesn't affect working capital since both current assets (Accounts Receivable) and the allowance (part of Accounts Receivable) are being reduced by the same amount.

Therefore, the correct answer is: a. Affects neither net income nor working capital.