Which of the following statements best describes the allowance method for accounting for uncollectible accounts?

• A. Bad debt expense is estimated and recorded in the same period as the related sales revenue.
• B. Bad debts are written off only when they are determined to be uncollectible.
• C. Bad debt expense is recorded only when a specific account is deemed uncollectible.
• D. No allowance account is used; accounts receivable are reduced directly.

Answer: (A)

Verified step by step guidance

1. Understand the concept of the allowance method: The allowance method is a technique used in accounting to estimate and record bad debt expense in the same period as the related sales revenue. This ensures compliance with the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.
2. Compare the allowance method to other methods: Unlike the direct write-off method, where bad debts are recorded only when they are deemed uncollectible, the allowance method uses an estimate to account for uncollectible accounts proactively.
3. Identify the role of the allowance account: In the allowance method, an allowance for doubtful accounts is created as a contra-asset account. This account reduces the accounts receivable balance on the balance sheet to reflect the estimated amount that is expected to be uncollectible.
4. Analyze the timing of bad debt expense recognition: The allowance method records bad debt expense in the same period as the related sales revenue, rather than waiting until a specific account is deemed uncollectible. This aligns with the accrual basis of accounting.
5. Evaluate the options provided: Based on the explanation above, the correct statement is: 'Bad debt expense is estimated and recorded in the same period as the related sales revenue.' The other options describe methods that do not align with the allowance method or the matching principle.