Under the allowance method, when a specific uncollectible account is written off, what is the effect on net income?

Under the allowance method, when a specific uncollectible account is written off, what is the effect on net income?

• A. It increases bad debt expense
• B. It decreases accounts receivable
• C. There is no effect on net income
• D. It decreases allowance for doubtful accounts

Answer: (C)

Under the allowance method, a write-off of a specific uncollectible account is a balance-sheet event that affects only AR and the allowance—no impact on net income. The normal entry is to debit Allowance for Doubtful Accounts and credit Accounts Receivable for the uncollectible amount. This reduces both assets and the contra-asset by the same amount, leaving the net realizable value of receivables changed but earnings unchanged. The bad debt expense was already recognized earlier when the allowance was established, so the income statement does not get a new expense at the time of the write-off. If the company used the direct write-off method, the write-off would reduce net income, but the allowance method keeps the income statement unaffected in the write-off event.

Under the allowance method, a write-off of a specific uncollectible account is a balance-sheet event that affects only AR and the allowance—no impact on net income. The normal entry is to debit Allowance for Doubtful Accounts and credit Accounts Receivable for the uncollectible amount. This reduces both assets and the contra-asset by the same amount, leaving the net realizable value of receivables changed but earnings unchanged. The bad debt expense was already recognized earlier when the allowance was established, so the income statement does not get a new expense at the time of the write-off. If the company used the direct write-off method, the write-off would reduce net income, but the allowance method keeps the income statement unaffected in the write-off event.