In bad debt recognition, what is a third step?

• A. When it's determined the customer will not repay the debt, move the amount to Uncollectible Accounts.
• B. At intervals, run an accounts receivable aging report to check on unpaid invoices.
• C. When a customer pays for something on credit, that amount is logged under Accounts Receivable.
• D. When a significant amount of time passes with no payment, move the money to a Doubtful Account.

Answer: (D)

Bad debt recognition with the allowance method involves setting aside an expected loss when a receivable becomes doubtful. After recognizing the sale and creating the accounts receivable, you review outstanding balances and, when it’s clear that payment is unlikely after a long period of nonpayment, you move that amount into the Doubtful Accounts (the allowance). This step records the expected loss and reduces reported receivables through a contra-asset, rather than waiting to know exactly which accounts will never pay. Writing off a specific debt goes to Uncollectible Accounts, aging reports are used to identify potential issues, and logging the receivable at the time of sale is initial recognition, not the bad debt recognition action.