Which of the following is true of the balance sheet presentation of the allowance for bad debts?

Which of the following is true of the balance sheet presentation
of the Allowance for Bad Debts? (A.) It is reported as a current liability. (B.) It is reported as an operating expense. (C.) It is reported as a separate, independent line item under
current assets. (D.) It is shown as a contra account related to accounts
receivable.

General guidance

Concepts and reason
Financial Statement: The basic financial statement includes the balance sheet which shows the entities overall assets, liabilities and the net worth as on date, income statement which shows the net income generated by the entity over a specified time period and the cash flow statements which shows the cash outflows and inflows over a period of time from all the entries.
Balance sheet: It is the financial statement which includes the assets, equity and liability of a corporation at a particular time. It identifies the company’s financial position. The steps for preparations of Balance Sheet are given below:
1. The first heading in the balance sheet preparation is assets. Under which the balances of currents assets are presented first, then the balances of long-term investments are entered and then the balances of plant, property, and equipment are entered.
2. The second heading in the balance sheet preparation is liabilities and shareholder’s equity. The liabilities are presented first, under which the balances of current liabilities and then the long-term debts balances are presented. Stockholder’s equity balances are entered after the liabilities.
3. Ensure that the total assets balance is equal to the sum of total liabilities and shareholder’s equity.

Fundamentals

Assets: It can be defined as the resources which are controlled and owned by the organization and which are capable of providing some future benefits for operating the core business of the organization. Examples of assets are Furniture, Machinery, Car, Cash and many others.
Current Assets: It means the short- term assets which can be convertible into cash within a period of one accounting year or operating cycle. It includes Accounts Receivables, Cash and Cash Equivalents, Inventories, and many others.
Current Liabilities: It refers to the short-term financial obligations for which payment is to be made in one accounting year or one operating cycle. It includes Accounts Payables, Outstanding Expenses, and others.
Accounts Receivable: It is an asset for the company. It is a consideration, which the company has the right to receive the goods or services provided to the customers. It is the payment which the company will receive in the future from its customers.
Operating Expenses: These are the expenses which are indirectly related to production like selling expenses, administrative expenses etcetera. They are incurred to bring the product to the market for sale.
Bad Debts: The debt which cannot be collected and has become worthless for its creditors is called as bad debt. This is treated an expense in the company’s income statement. This is the amount that cannot be recovered and has become valueless to the company.
Allowance for Doubtful debt: This is an account on the company’s balance sheet and it reduced the balance of accounts receivables. Any change in the account for allowance for doubtful debts also result in the change in bad debt expense.
Contra asset: It is an asset where the balance of asset would be either credit or zero. As the asset in having credit is not a normal situation or is contrary to the expected balance of asset, therefore this asset account is known as contra asset account.

Step-by-step

Step 1 of 2

Allowance for bad debts is not presented on the liability side in the balance sheet of the company, it is shown as a reduction from the balance of receivables. Therefore, it is not reported as a current liability.
The balances of assets and liabilities are to be presented in the company’s balance sheet. The operating expenses are not presented in the balance sheet. Therefore, allowance for bad debt is not reported as an operating expense in the balance sheet.
Allowance for bad debt is the estimated amount which is likely to become uncollectible in future. It cannot be represented as a current asset on the company’s balance sheet.

Allowance for bad debt is presented as a reduction from the balance of receivables, in the company’s balance sheet. It is a contra asset and all the contra asset are presented as a reduction from the balance of assets.

Based on the information given in the question, identify and explain the correct statement.

Step 2 of 2

Allowance for bad debt is an estimation of the amount which is likely to become bad debts in future. This is a contra asset for the company and therefore is shown as a reduction from the balance of receivables.

The statement that allowance for bad debt is shown as contra asset related to accounts receivables is true.

Allowance for bad debt is a contra asset and the balances of contra asset are required to be presented in the balance sheet as a deduction from the accounts receivables. Therefore, allowance for bad debt is a contra asset which is related to the accounts receivables.

Answer

The statement that allowance for bad debt is shown as contra asset related to accounts receivables is true.

Answer only

The statement that allowance for bad debt is shown as contra asset related to accounts receivables is true.

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