Which method estimates bad debt expense and records the amount in a contra-asset allowance account?

Which method estimates bad debt expense and records the amount in a contra-asset allowance account?

• A. Direct Write Off
• B. Allowance Method
• C. Net Realizable Value A/R
• D. Book Value

Answer: (B)

The method that estimates bad debt expense and records the amount in a contra-asset allowance account is the allowance method. It works by estimating the portion of accounts receivable that may not be collected and charging that estimate as an expense in the same period the sales occur. At the same time, a contra-asset account called Allowance for Doubtful Accounts is established, which reduces Accounts Receivable on the balance sheet to reflect expected uncollectibles. This approach aligns expenses with the revenues they help generate (the matching principle) and keeps the net realizable value of receivables realistic. In contrast, the direct write-off method only records bad debt expense when a specific account is deemed uncollectible, and it does not use a contra-asset allowance, which can distort both expenses and the value of receivables. Net realizable value of AR and book value describe the resulting measurements, not the method of recognizing bad debts.

The method that estimates bad debt expense and records the amount in a contra-asset allowance account is the allowance method. It works by estimating the portion of accounts receivable that may not be collected and charging that estimate as an expense in the same period the sales occur. At the same time, a contra-asset account called Allowance for Doubtful Accounts is established, which reduces Accounts Receivable on the balance sheet to reflect expected uncollectibles. This approach aligns expenses with the revenues they help generate (the matching principle) and keeps the net realizable value of receivables realistic. In contrast, the direct write-off method only records bad debt expense when a specific account is deemed uncollectible, and it does not use a contra-asset allowance, which can distort both expenses and the value of receivables. Net realizable value of AR and book value describe the resulting measurements, not the method of recognizing bad debts.