CSLB Law & Business ExamBusiness FinancesHard
A contractor determines that a customer's $6,000 invoice for completed work is uncollectible and writes it off as bad debt. What is the effect of this write-off on the contractor's income statement?
- ANet income decreases because the write-off is recorded as an expense (or reduction of revenue)
- BRevenue increases by $6,000 to offset the loss
- CThe write-off is recorded only on the balance sheet, not the income statement
- DThe write-off has no effect since the cash was never received
Show answer & explanationAnswer & explanation
Correct answer: A. Net income decreases because the write-off is recorded as an expense (or reduction of revenue)
Because the contractor already recognized the $6,000 as revenue under accrual accounting when the invoice was issued, writing it off as uncollectible requires recording a bad debt expense (or reduction to revenue), which decreases net income for the period.
Why the other options are wrong
- B. Incorrect: bad debt write-offs decrease income, not increase revenue.
- C. Bad debt write-offs directly affect the income statement, not just the balance sheet.
- D. Incorrect: since revenue was already recognized, the write-off does affect reported income.
Bad Debt Write-off
The removal of an uncollectible receivable from the books, recorded as an expense that reduces net income.
- Applies mainly under accrual accounting where revenue was already recognized
- Recorded as bad debt expense on the income statement
- Reduces accounts receivable on the balance sheet
Memory trick: Once you count it as earned, losing it becomes a real expense.