Cengage Accounting Exam 1 Practice Test 2026 – Complete Study Guide

Under the allowance method, you recognize the cost of uncollectible accounts by recording a bad debt expense and creating a contra-asset that reduces accounts receivable. The correct entry debits Bad Debt Expense to reflect the expense on the income statement and credits Allowance for Doubtful Accounts to establish the expected write-offs as a reserve. This preserves the net realizable value of receivables on the balance sheet.

The other options mix up the directions: debiting Accounts Receivable would not represent an estimated loss; debiting Cash is irrelevant to recognizing uncollectibles; debiting the Allowance for Doubtful Accounts would actually decrease the allowance, not increase it, and pairing that with a credit to Bad Debt Expense would incorrectly adjust both accounts.

Later, when you actually write off a specific uncollectible, you would debit Allowance for Doubtful Accounts and credit Accounts Receivable, which reduces both the reserve and the receivable without affecting the income statement at that moment.