Answer:
The answer is: A
Explanation:
When a business makes a sale on credit, the debtors may not always be able to pay the amount owing in full. This is because businesses sometimes face insolvency (when a business does not generate as much money as it consumes and as a result is unable to pay its creditors). Businesses which sell on credit have to be prudent in recording the expected cash flows from their credit sales. This prudence principle is significant in accounting and dictates that any expenses or liabilities of the business must be recorded as they occur and revenues associated should be recognised as they are realised. Pursuant to this principle, businesses make an estimation of the amount of revenue which they estimate not to recover and write it off as a bad debt. This bad debt is deemed to be the irrecoverable amount from credit sales made. It is recognised as a business expense and the allowance is made in a contra account to Accounts Receivable known as the Allowance for Doubtful Debt account which effectively reduces the Accounts Receivable value. The journal entry to record this adjustment is as follows:
Debit Bad Debts Expense $15,000
Credit Allowance for Doubtful Debt $15,000
