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Under the allowance method, what is the nature of the Allowance for receivables account?
AAn expense account closed to profit or loss each period
BA revenue account that records interest on overdue balances
CA contra asset that absorbs non-payment when a receivable is written off
DA current liability owed to customers who overpaid
Answer & Solution
Correct answer: C. A contra asset that absorbs non-payment when a receivable is written off
1. The allowance is a contra asset offsetting Receivables on the balance sheet.
2. It absorbs non-payment when a customer's account is closed out.
3. It is not an expense or revenue account, so those options are wrong.
4. It is not a liability, so the liability option is wrong.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.4.2 "Allowance Method", p.139_
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