What does a debit balance in the Allowance for Doubtful Accounts before year-end adjustments most likely indicate?

• A. Actual bad debts written off exceeded previous estimates.
• B. The company overestimated its bad debts in prior periods.
• C. All accounts receivable have been collected.
• D. No bad debts have occurred during the period.

Answer: (A)

Verified step by step guidance

1. Understand the role of the Allowance for Doubtful Accounts: This account is a contra-asset account used to estimate and record potential uncollectible accounts receivable. It is adjusted periodically to reflect expected bad debts.
2. Recognize the normal balance of the Allowance for Doubtful Accounts: Normally, this account has a credit balance because it reduces the Accounts Receivable balance on the balance sheet.
3. Interpret a debit balance in the Allowance for Doubtful Accounts: A debit balance indicates that the actual bad debts written off during the period exceeded the previous estimates recorded in the account.
4. Analyze the options provided: The correct interpretation aligns with the idea that actual bad debts written off were higher than the estimated amount, leading to a debit balance.
5. Conclude that the most likely explanation is: 'Actual bad debts written off exceeded previous estimates,' as this directly explains why the Allowance for Doubtful Accounts would have a debit balance before year-end adjustments.