Practice Question
What is the effect of recording bad debt expense on the income statement?
- It reduces net income because it is recorded as an expense.
- It increases net income by reducing liabilities.
- It has no effect on net income but increases cash flow.
- It reduces revenue directly and increases assets.
Answer +
Correct Answer: A
Explanation +
Recording bad debt expense reduces net income on the income statement because it is recognized as an operating expense.
This reflects the estimated amount of receivables that may not be collected and ensures the financial statements are realistic. It also increases the Allowance for Doubtful Accounts, a contra-asset that offsets Accounts Receivable.