Question

Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?

Question 7 options:

	Increase liabilities and decrease stockholders' equity.
	Increase assets and decrease stockholders' equity
	Decrease assets and decrease liabilities.
	Decrease assets and decrease stockholders' equity

Answer 1

The journal entry to record the estimate of bad debts expense under the percentage of accounts receivable is as follows -

Bad debts expense A/C Dr.

To allowance for doubtful accounts.

This entry reduces the amount of current assets(accounts receivable) and also reduces the amount of stockholders' equity as the reserve is created for such bad debts.

So, the journal entry to record estimate of uncollectible accounts based on the percentage of accounts receivables decreases the assets and also decreases the stockholders' equity.