In financial accounting, what is the major problem a company faces when it sells goods or services on credit (rather than for cash) and records an account receivable?

• A. The company must record a liability because selling on credit increases amounts owed to suppliers.
• B. The company cannot report accounts receivable on the balance sheet because receivables are off-balance-sheet items.
• C. The company may not collect the receivable, creating the risk of uncollectible accounts (bad debts).
• D. The company is prohibited from recognizing revenue until the customer pays cash.

Answer: (C)

Verified step by step guidance

1. Understand that when a company sells goods or services on credit, it records an account receivable, which represents the amount owed by customers.
2. Recognize that the major issue with accounts receivable is the risk that some customers may not pay their debts, leading to uncollectible accounts or bad debts.
3. Note that this risk affects the company's financial statements because it may need to estimate and record an allowance for doubtful accounts to reflect potential losses.
4. Remember that accounts receivable are reported as assets on the balance sheet, not liabilities, and they are not off-balance-sheet items.
5. Also, understand that revenue recognition typically occurs at the point of sale on credit, not necessarily when cash is received, according to accrual accounting principles.