- This topic has 3 replies, 3 voices, and was last updated 7 years, 6 months ago by
.
-
Topic
-
Hi!
Could you please assist me with the MCQ posted below and the related query-
What is the relationship between the allowance for doubtful accounts and working capital?
A. When an account is written off against the allowance, cash decreases.
B. When an account is written off against the allowance, working capital decreases.
C. When bad debts expense is recorded for the period, cash increases.
D. When bad debts expense is recorded for the period, working capital decreases.
Answer (D) is correct.
Working capital equals current assets minus current liabilities. Current accounts receivable are reported in the financial statements at their net realizable value (i.e., net of allowance for doubtful accounts). A recognition of bad debt expense increases the allowance for doubtful accounts, which decreases current accounts receivable. The decrease in current accounts receivable decreases working capital.My query is – Allowance for doubtful accounts is a contra account. The entry for allowance is
Allowance for Doubtful a/c Dr
To Accounts Receivable
As the contra Asset increases, doesn’t it nullify the decrease in Current Asset and thereby creating no change in Working Capital?
Kindly share your thoughts!AUD - NINJA in Training
BEC - 86
FAR - NINJA in Training
REG - NINJA in Training"If you study, you will pass"
- You must be logged in to reply to this topic.
