Which of the following is a true statement about a company that uses the allowance method for accounting for doubtful accounts?

• A. The allowance for doubtful accounts is reported as a liability on the balance sheet.
• B. Accounts receivable are written off only when the customer declares bankruptcy.
• C. Bad debt expense is estimated and recorded in the same period as the related sales revenue.
• D. No adjusting entry is required at the end of the period for uncollectible accounts.

Answer: (C)

Verified step by step guidance

1. Understand the allowance method for accounting for doubtful accounts. This method is used to estimate and record bad debt expense in the same period as the related sales revenue, ensuring compliance with the matching principle in accounting.
2. Clarify the role of the allowance for doubtful accounts. It is a contra-asset account, not a liability, and is reported on the balance sheet as a reduction to accounts receivable.
3. Recognize that accounts receivable are written off when they are deemed uncollectible, not necessarily only when the customer declares bankruptcy. The write-off process involves reducing both accounts receivable and the allowance for doubtful accounts.
4. Understand the need for an adjusting entry at the end of the period. An adjusting entry is required to estimate uncollectible accounts and record bad debt expense, ensuring the financial statements reflect the expected realizable value of accounts receivable.
5. Conclude that the correct statement is: 'Bad debt expense is estimated and recorded in the same period as the related sales revenue,' as this aligns with the principles of the allowance method and the matching principle.