Under the allowance method, how is bad debt expense recognized?

Under the allowance method, how is bad debt expense recognized?

• A. In the period of sale matching revenue with expense.
• B. Only when accounts are written off.
• C. When cash is received from customer.
• D. It is never recognized.

Answer: (A)

Under the allowance method, bad debt expense is recognized in the period of sale by estimating uncollectible accounts and recording an adjusting entry. This matches the expense with the revenue earned in the same period. For example, you may estimate a percentage of receivables will be uncollectible and debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The allowance then sits on the balance sheet as a contra-asset to reduce Accounts Receivable. When a specific account is later deemed uncollectible, you write it off by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable. This reduces the asset and the allowance, but it does not affect net income because the bad debt expense was already recognized earlier. So the correct approach is recognizing the expense in the period of sale, not only at the time of write-off, not when cash is collected, and not never recognizing it.

Under the allowance method, bad debt expense is recognized in the period of sale by estimating uncollectible accounts and recording an adjusting entry. This matches the expense with the revenue earned in the same period. For example, you may estimate a percentage of receivables will be uncollectible and debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The allowance then sits on the balance sheet as a contra-asset to reduce Accounts Receivable.

When a specific account is later deemed uncollectible, you write it off by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable. This reduces the asset and the allowance, but it does not affect net income because the bad debt expense was already recognized earlier.

So the correct approach is recognizing the expense in the period of sale, not only at the time of write-off, not when cash is collected, and not never recognizing it.