PRC-1 · Chapter 5 · Question 34 of 100
If an entity has an allowance for doubtful debts of Rs. 10,000, and then a specific customer with a balance of Rs. 2,000 goes bankrupt, how does the WRITE-OFF of this Rs. 2,000 debt fundamentally alter the 'Allowance' account balance in the PRC-1 standard approach?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) It does not directly touch the allowance account; it is debited to Bad Debt Expense and the allowance is adjusted separately at year-end.
Explanation
In standard PRC-1 methodology, actual bad debt write-offs are debited to Bad Debt Expense. The Allowance account remains static during the year and is only re-evaluated and adjusted at year-end based on closing receivables.
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