Question

When using the allowance​ method, the​ write-off of a receivable​ ________.

A. decreases net income
B. involves a​ contra-revenue account
C. reduces the amount of the Allowance for Bad Debts account
D. affects the net realizable value of accounts receivable

Answer 1

Correct option is (C)

Step-by-step explanation:

There are some receivables that are likely to be uncollectible. These are called bad debts. An allowance for bad debts account is created as a reserve that is deducted from accounts receivables to show true value of accounts receivables, called net realizable value in the balance sheet.

When a receivable is written off, that is it is uncollectible, then this amount is reduced from both accounts receivable and allowance for bad debts account.

As such, write off of a receivable reduces allowance for bad debts.