Question

Under the allowance method for uncollectible accounts, the balance of allowance for uncollectible accounts increases when?

1) Never
2) Cash is received from customers
3) Bad debts actually occur
4) Future bad debts are estimated

Answer 1

The balance of allowance for uncollectible accounts increases when future bad debts are estimated.

Step-by-step explanation:

The balance of allowance for uncollectible accounts increases when future bad debts are estimated.

The allowance for uncollectible accounts is a contra-asset account that is used to estimate and record the potential bad debts that may arise from credit sales. As a result, it increases when the company estimates that there will be a higher probability of bad debts in the future.

For example, if a company experiences an economic downturn and predicts that more customers may default on their payments, it will increase the balance of the allowance for uncollectible accounts to prepare for potential bad debts.