What are the effects on the accounting equation when a company makes the adjustment to record bad debts expense using the allowance method?
A)Assets and stockholders' equity increase.
B)Assets and stockholders' equity decrease.
C)Assets increase and stockholders' equity decreases.
D)Assets decrease and stockholders' equity increases.

Question

Quizplus · Accepted Answer

When a company records bad debts expense using the allowance method, it increases the allowance for doubtful accounts (a contra asset account) and records bad debt expense. This decreases total assets (since the net accounts receivable decreases) and decreases stockholders' equity (due to the increase in expenses, which reduces net income and, consequently, retained earnings).

What Are the Effects on the Accounting Equation When a Company