In the allowance method for uncollectible accounts, what does a debit balance in the Allowance for Doubtful Accounts most likely indicate at period-end (before any adjusting entry)?

• A. Bad Debt Expense has been overstated and must be debited to correct the allowance balance.
• B. Accounts receivable has been overstated and must be credited directly to reduce it to net realizable value.
• C. Actual write-offs during the period exceeded the beginning credit balance and any recoveries, leaving the allowance temporarily underfunded.
• D. The company is using the direct write-off method and should close the allowance account to zero at year-end.

Answer: (C)

Verified step by step guidance

1. Understand that the Allowance for Doubtful Accounts is a contra-asset account that normally has a credit balance, representing estimated uncollectible amounts from accounts receivable.
2. Recognize that a debit balance in the Allowance for Doubtful Accounts at period-end means the actual write-offs during the period were greater than the existing credit balance in the allowance account plus any recoveries.
3. Interpret this debit balance as the allowance being 'underfunded,' meaning it does not have enough balance to cover the write-offs that have occurred.
4. Note that this situation does not imply that bad debt expense has been overstated or that accounts receivable is directly overstated; rather, it reflects the timing and magnitude of write-offs relative to the estimated allowance.
5. Conclude that the debit balance signals the need to adjust the allowance account to restore an appropriate credit balance, typically by recording additional bad debt expense in the adjusting entry.