Question

Establishing an allowance for doubtful accounts under the allowance method is necessary because.

A) It follows accounting rules
B) It aligns with tax regulations
C) It recognizes potential losses
D) It increases profits

Answer 1

Establishing an allowance for doubtful accounts under the allowance method is necessary because it recognizes potential losses.

Step-by-step explanation:

Establishing an allowance for doubtful accounts under the allowance method is necessary because it recognizes potential losses. This means that the company sets aside a portion of its accounts receivable as an estimate of the amount that may not be collected from customers.

By establishing this allowance, the company can accurately reflect the value of its accounts receivable on its balance sheet and provide a more realistic picture of its financial position to stakeholders.