Bad debt write-off involves which action?

Bad debt write-off involves which action?

• A. Recording a cash donation
• B. Recording an uncollectible debt as an expense; board resolution
• C. Writing off a tax credit
• D. Increasing member dues

Answer: (B)

The action tested is recognizing that a receivable is uncollectible and accounting for the loss by recording it as an expense and removing the receivable from the books. When you determine a debt cannot be collected, you write it off, which typically debits Bad Debt Expense (or reduces the Allowance for Doubtful Accounts) and credits Accounts Receivable. This reflects the loss and reduces assets accordingly. In some organizations, a board resolution is used to authorize the write-off, but the essential accounting effect is recording the uncollectible amount as an expense and eliminating it from receivables. The other options don’t address uncollectible receivables: recording a cash donation involves cash inflows, a tax credit write-off relates to taxes, and increasing member dues affects revenue, not the write-off of bad debts.

The action tested is recognizing that a receivable is uncollectible and accounting for the loss by recording it as an expense and removing the receivable from the books. When you determine a debt cannot be collected, you write it off, which typically debits Bad Debt Expense (or reduces the Allowance for Doubtful Accounts) and credits Accounts Receivable. This reflects the loss and reduces assets accordingly. In some organizations, a board resolution is used to authorize the write-off, but the essential accounting effect is recording the uncollectible amount as an expense and eliminating it from receivables. The other options don’t address uncollectible receivables: recording a cash donation involves cash inflows, a tax credit write-off relates to taxes, and increasing member dues affects revenue, not the write-off of bad debts.