U4, AOS 1 - Allowance for Doubtful Debts Flashcards
What is the primary purpose of creating an allowance for doubtful debts?
To estimate the amount of accounts receivable that may not be collected.
True or False: An allowance for doubtful debts is recorded as an asset on the balance sheet.
False
Fill in the blank: The allowance for doubtful debts is a contra-________ account.
asset
Which financial statement reflects the allowance for doubtful debts?
Balance Sheet
What method is commonly used to estimate the allowance for doubtful debts?
Percentage of sales method or aging of accounts receivable method.
True or False: An increase in the allowance for doubtful debts reduces net income.
True
What is the journal entry to record an increase in the allowance for doubtful debts?
Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts.
What does a high allowance for doubtful debts indicate?
A higher risk of uncollectible accounts.
True or False: The allowance for doubtful debts affects cash flow directly.
False
Fill in the blank: Companies use the allowance for doubtful debts to comply with the ________ principle.
matching
What is the impact on total assets when a company writes off an account as uncollectible?
No impact, as both accounts receivable and allowance decrease.
True or False: The allowance for doubtful debts is based on historical data and future expectations.
True
What is the relationship between accounts receivable and allowance for doubtful debts?
Allowance for doubtful debts reduces the net accounts receivable on the balance sheet.
Which accounts are affected when an account is written off?
Allowance for Doubtful Accounts and Accounts Receivable.
Fill in the blank: The allowance for doubtful debts is typically reviewed ________ to ensure accuracy.
annually
What is the effect of estimating a higher allowance for doubtful debts on a company’s financial statements?
Lower net income and lower total assets.
True or False: The allowance for doubtful debts can be adjusted at any time during the accounting period.
True
What is the typical range for the percentage used in the percentage of sales method for estimating doubtful debts?
1% to 5% of sales.
True or False: The allowance for doubtful debts is the same as direct write-off method.
False
What type of account is ‘Allowance for Doubtful Accounts’ classified as?
Contra asset account.
