Under the allowance method, when is an account considered uncollectible?

• A. When the customer is more than 30 days late on payment
• B. When management determines there is no reasonable expectation of collection
• C. When the account is first recorded as a receivable
• D. When the allowance for doubtful accounts reaches zero

Answer: (B)

Verified step by step guidance

1. Understand the allowance method: The allowance method is a way to account for bad debts by estimating uncollectible accounts at the end of each accounting period. This ensures that expenses are matched with revenues in the same period.
2. Identify the key concept of uncollectibility: An account is considered uncollectible when there is no reasonable expectation of collection. This determination is typically made by management based on specific criteria, such as the customer's financial situation or payment history.
3. Evaluate the timing of uncollectibility: The account is not considered uncollectible simply because it is overdue (e.g., more than 30 days late) or when it is first recorded as a receivable. These are not sufficient conditions to classify an account as uncollectible.
4. Understand the role of the allowance for doubtful accounts: The allowance for doubtful accounts is a contra-asset account used to estimate and record potential bad debts. However, the account being uncollectible is not dependent on the allowance account reaching zero.
5. Conclude the correct condition: Based on the allowance method, an account is considered uncollectible when management determines there is no reasonable expectation of collection, as this aligns with the principle of conservatism in accounting.