The allowance for uncollectible accounts is
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A. B. C. D.D
Allowance for Uncollectible Accounts, sometimes referred to as Bed Debt Reserve, is a contra account to Accounts Receivable.
The allowance for uncollectible accounts, also known as the allowance for doubtful accounts or bad debt reserve, is an accounting estimate of the amount of accounts receivable that is expected to be uncollectible. It is used to recognize potential losses from customers who are unlikely to pay their outstanding debts.
Out of the provided answer choices, the correct answer is D. "a contra account."
A contra account is an account that is paired with another related account and is used to offset or reduce the balance of that account. In the case of the allowance for uncollectible accounts, it is a contra account that reduces the balance of accounts receivable on the balance sheet.
When a company extends credit to customers and records accounts receivable, it also recognizes that a portion of those receivables may not be collected. The allowance for uncollectible accounts is created to reflect this estimated amount. It is established through an adjusting entry, usually based on historical data, industry trends, and the company's experience with collecting debts.
The allowance for uncollectible accounts is reported on the balance sheet as a deduction from accounts receivable. By doing so, it presents a more realistic picture of the company's accounts receivable, as it reflects the portion that is expected to be uncollectible.
Option A, "a reduction in revenue," is incorrect. The allowance for uncollectible accounts does not directly affect revenue. It is a balance sheet item and does not impact the recognition of revenue.
Option B, "a liability," is incorrect. The allowance for uncollectible accounts is not considered a liability. It is a contra account to accounts receivable, and contra accounts are not classified as liabilities.
Option C, "long-term asset," is incorrect. The allowance for uncollectible accounts is not a long-term asset. It represents an estimate of potential losses on short-term accounts receivable, and it is classified as a contra account on the balance sheet, which is a type of asset reduction.
In summary, the allowance for uncollectible accounts is a contra account that reduces the balance of accounts receivable on the balance sheet. It represents an estimated amount of accounts receivable that is expected to be uncollectible.