Which statement about the allowance for doubtful accounts is true?

• A. It is a contra-asset used to reduce net accounts receivable; the usual entry is credit Allowance for Doubtful Accounts and debit Bad Debt Expense.
• B. It increases net accounts receivable.
• C. It is a liability account used to reserve for bad debts.
• D. It is a revenue account used to recognize future collections.

Answer: (A)

The allowance for doubtful accounts is a contra-asset that reduces the net amount of accounts receivable to reflect expected uncollectible amounts. Recording estimated uncollectibles debits Bad Debt Expense (an expense) and credits Allowance for Doubtful Accounts (a negative asset). This entry increases current period expense while increasing the allowance, which lowers the net realizable value of receivables. It does not increase net accounts receivable, and it is not a liability or revenue. When a specific account is written off, you would debit the allowance and credit accounts receivable, which uses the reserve without affecting the current period income statement.