Failing to record bad debt expense for the period will result in fraudulently overstated accounts receivable.

• A. False
• B. It has no impact on the allowance for doubtful accounts
• C. True
• D. It increases accounts receivable directly without affecting any allowance

Answer: (C)

When you report accounts receivable, you present net realizable value, which is AR minus the allowance for doubtful accounts. The allowance method uses a bad debt expense to reflect estimated uncollectibles and to increase the allowance, thereby reducing net AR and aligning income with the cash you expect to collect.

If you fail to record the bad debt expense, the allowance is not increased and the bad debt expense isn’t recognized, so accounts receivable remains overstated. This creates a fraudulent-looking overstatement of assets and income because the expected losses aren’t reflected in the financial statements.

So the statement is true. It would be incorrect to say there’s no impact on the allowance, or that AR would increase directly without affecting any allowance, because the proper accounting reduces net AR through the allowance and records the expense.