Receivables not expected to be collected should:

• A. be ignored until the customer declares bankruptcy
• B. be immediately written off as a direct expense
• C. remain in accounts receivable until written off
• D. be estimated and recorded as an allowance for doubtful accounts

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'Allowance for Doubtful Accounts': This is a contra-asset account used to estimate the portion of accounts receivable that may not be collected. It reflects the company's expectation of uncollectible receivables based on historical data and current conditions.
2. Recognize the importance of matching principle: In financial accounting, expenses should be recognized in the same period as the revenues they help generate. Estimating uncollectible accounts ensures that bad debt expense is recorded in the same period as the related sales revenue.
3. Learn the process of estimation: Companies typically use methods such as the percentage of sales method or the aging of accounts receivable method to estimate the allowance for doubtful accounts. These methods rely on historical data and analysis of outstanding receivables.
4. Record the journal entry: To account for the estimated uncollectible receivables, a company debits 'Bad Debt Expense' and credits 'Allowance for Doubtful Accounts.' This entry adjusts the financial statements to reflect the expected loss.
5. Understand the impact on financial statements: The allowance for doubtful accounts reduces the net accounts receivable reported on the balance sheet, providing a more accurate representation of the company's financial position.