When an account of a debtor is written off, the current assets of the business entity is unaffected

When an account of a debtor is written off, the current assets of the business entity is unaffected.

True False

The correct answer and explanation is:

Answer: True

Explanation:

When an account of a debtor (i.e., an accounts receivable) is written off, it means the business has determined that the amount owed by the debtor is uncollectible and removes it from its books.

To understand why the current assets are unaffected, let’s break down the process:

1. Accounts Receivable and Allowance for Doubtful Accounts:
   Accounts receivable is classified as a current asset because it represents money owed to the business that is expected to be collected within a short period (usually less than a year). Before writing off a specific account, businesses often create an Allowance for Doubtful Accounts, a contra-asset account that estimates the amount of receivables unlikely to be collected. This allowance is deducted from total accounts receivable on the balance sheet, giving a realistic value of expected collectible amounts.
2. Writing Off the Debtor’s Account:
   When a particular debtor’s account is written off, the business removes the specific accounts receivable amount from both:
   • Accounts Receivable (current asset)
   • The Allowance for Doubtful Accounts (contra asset)
   The journal entry typically is: Debit: Allowance for Doubtful Accounts Credit: Accounts Receivable
3. Effect on Current Assets:
   Notice that both the debit and credit affect asset accounts (one reduces the allowance, the other reduces accounts receivable). Since the allowance is a contra asset, reducing it while simultaneously reducing accounts receivable by the same amount results in no net change to the total current assets.
4. If No Allowance Method Used:
   If the business directly writes off accounts receivable without using an allowance, the write-off would reduce accounts receivable and record an expense, reducing net income. This would decrease total assets. However, under generally accepted accounting principles (GAAP), the allowance method is preferred because it matches expenses with revenues in the correct period.

Summary:
Under the allowance method (the standard accounting practice), writing off an uncollectible account decreases accounts receivable and the allowance for doubtful accounts equally. This means the net current assets remain the same, so the statement is True. The current assets are unaffected at the moment of write-off because the expected loss was already accounted for in the allowance.