Question

a company determined that a customer's account receivable was uncollectible and that the account should be written off. assuming the direst write off method is used to account for bad debts what effect will this write off have on the company's net income and total assets?

Answer 1

Net income and total assets decrease

Step-by-step explanation:

When a company uses the direct write off method it doesn't use any allowance for doubtful accounts, it simply writes off uncollectible accounts. The journal entry should be as follows:

Dr Bad debt expense $XYZ

Cr Accounts receivable $XYZ

When a debt is written off, net income will increase, since bad debt expense increases. Also, accounts receivable decrease in the same amount, so total assets decrease.

Answer 2

The write off does not affect the realizable value of accounts receivable. Neither total assets nor net income is affected by the write off a specific account.Instead both assets and net income are affected in the period when bad debts expense is predicted and recorded with an adjusting entry.

Assets = Liabilities + Equity

Less= No Effect + Less

When the bad debts are written off the assets are decreased in the sense that less cash is received for accounts receivables and also Equity is decreased as less income is reported.

Both income statement and balance sheet are affected with the bad debts.In the balance sheet it affects the accounts receivable and Equity for less income. The income statement is affected when the bad debts are expensed out . It is an expense.