Which type of receivable is most directly affected by the estimation and recording of bad debts expense?

• A. Accounts Receivable
• B. Interest Receivable
• C. Advances to Employees
• D. Notes Receivable

Answer: (A)

Verified step by step guidance

1. Understand the concept of bad debts expense: Bad debts expense is an estimate of the amount of accounts receivable that a company does not expect to collect due to customers' inability or unwillingness to pay.
2. Identify the type of receivable most directly affected: Bad debts expense is specifically related to accounts receivable, as it represents amounts owed by customers for goods or services provided on credit.
3. Differentiate between the options: Interest receivable, advances to employees, and notes receivable are not directly affected by bad debts expense because they represent other types of receivables, such as interest earned, employee loans, or formal written promises to pay.
4. Connect bad debts expense to accounts receivable: The estimation and recording of bad debts expense adjust the accounts receivable balance to reflect the expected collectible amount, ensuring accurate financial reporting.
5. Conclude that accounts receivable is the correct answer: Since bad debts expense is directly tied to the collectability of accounts receivable, it is the type of receivable most affected by this estimation and recording process.