Under GAAP, for accounts receivable that may not be collectible, what should be recorded?

Under GAAP, for accounts receivable that may not be collectible, what should be recorded?

• A. Write off immediately
• B. Record a separate revenue item
• C. Record an allowance for doubtful accounts against the receivable
• D. Ignore the potential uncollectible amount

Answer: (C)

When an accounts receivable may not be collected, GAAP requires recognizing the expected loss by setting up an allowance for doubtful accounts. This contra-asset reduces the amount shown for receivables, leaving the net realizable value that you actually expect to collect. The typical entry to establish this estimate is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts, aligning the expense with the period in which the revenue was recognized. Later, if a specific receivable is confirmed uncollectible, you write it off by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable, which doesn’t disturb the income statement again and keeps assets at their realizable amount. This approach keeps financial statements accurate by matching potential losses with the revenues they relate to and presenting receivables at their net realizable value. Writing off immediately would remove the asset without recognizing the related expense in the same period, recording a separate revenue item would misstate income, and ignoring the potential uncollectible amount would overstate both assets and net income.

When an accounts receivable may not be collected, GAAP requires recognizing the expected loss by setting up an allowance for doubtful accounts. This contra-asset reduces the amount shown for receivables, leaving the net realizable value that you actually expect to collect. The typical entry to establish this estimate is to debit Bad Debt Expense and credit Allowance for Doubtful Accounts, aligning the expense with the period in which the revenue was recognized. Later, if a specific receivable is confirmed uncollectible, you write it off by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable, which doesn’t disturb the income statement again and keeps assets at their realizable amount.

This approach keeps financial statements accurate by matching potential losses with the revenues they relate to and presenting receivables at their net realizable value. Writing off immediately would remove the asset without recognizing the related expense in the same period, recording a separate revenue item would misstate income, and ignoring the potential uncollectible amount would overstate both assets and net income.