To represent the potential of some buyers to not pay their invoices the seller will have to:
(a) Record a certain amount of Sales or Accounts Receivable to Accumulated Depreciation
(b) Not extend credit
(c) Eliminate offering a cash discount
(d) Charge everyone more
(e) Record a certain amount of Sales or Accounts Receivable to Allowance for Doubtful Accounts
Accounts receivable is a current asset on the balance sheet that represents amounts due from credit customers. Companies often extend credit to customers and allow them to pay for products or services at a later date.
Answer and Explanation:
Answer choice (e) Record a certain amount of Sales or Accounts Receivable to Allowance for Doubtful Accounts
Generally Accepted Accounting Principles (GAAP) requires companies to use the allowance method to record bad debt. Bad debt expense is estimated and accrued at the time of the related sale. The potential of some buyers to not pay their invoices is recorded as a debit to bad debt expense and a credit to allowance for doubtful accounts as a percentage of sales or accounts receivable.
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from Accounting 101: Financial AccountingChapter 7 / Lesson 1