Which journal entries correctly record a sale on credit and indicate the purpose of the Allowance for Doubtful Accounts?

Which journal entries correctly record a sale on credit and indicate the purpose of the Allowance for Doubtful Accounts?

• A. Debit Revenue, Credit Accounts Receivable; Allowance is a liability.
• B. Debit Accounts Receivable, Credit Revenue; Allowance is a contra-asset to estimate uncollectibles.
• C. Debit Cash, Credit Revenue; Allowance is an asset.
• D. Debit Revenue, Credit Cash; Allowance is a contra-revenue.

Answer: (B)

Recording a sale on credit involves recognizing the amount owed by the customer and the revenue from the sale. You debit Accounts Receivable to show the increase in assets the customer owes, and you credit Revenue to reflect the earned income from the sale. The Allowance for Doubtful Accounts is a contra-asset used to estimate the portion of receivables that may not be collected; it reduces the net value of Accounts Receivable on the balance sheet and is funded by an expense entry (Bad Debt Expense) when estimates are made. So the correct approach shows Accounts Receivable increasing and Revenue increasing, with the allowance defined as a contra-asset used to estimate uncollectibles. The other options misstate accounts involved or misclassify the allowance.

Recording a sale on credit involves recognizing the amount owed by the customer and the revenue from the sale. You debit Accounts Receivable to show the increase in assets the customer owes, and you credit Revenue to reflect the earned income from the sale. The Allowance for Doubtful Accounts is a contra-asset used to estimate the portion of receivables that may not be collected; it reduces the net value of Accounts Receivable on the balance sheet and is funded by an expense entry (Bad Debt Expense) when estimates are made. So the correct approach shows Accounts Receivable increasing and Revenue increasing, with the allowance defined as a contra-asset used to estimate uncollectibles. The other options misstate accounts involved or misclassify the allowance.