Fenchurch Corp.uses the direct write-off method to account for bad debts.What are the effects on the accounting equation of the entry to record the write-off of a customer's account balance?
A) Assets and liabilities decrease.
B) Assets and owners' equity decrease.
C) Owners' equity decrease and liabilities increase.
D) No effect; assets increase and decrease by the same amount.

Question

Quizplus · Accepted Answer

When using the direct write-off method, the write-off of a customer's account means that the accounts receivable (an asset) is decreased and the allowance for doubtful accounts (a contra-asset account) is not affected. This results in a decrease in assets. The bad debt expense, which was previously recorded when estimating the bad debt, is now recognized as a loss and decreases owners' equity. Therefore, the write-off decreases both assets and owners' equity, making B the correct choice. Liabilities are not affected by the write-off. D is incorrect because assets and owners' equity do not increase by the same amount.