What is the effect on the income statement when bad debt is recorded?

What is the effect on the income statement when bad debt is recorded?

• A. It increases assets
• B. It reduces profit
• C. It increases revenue
• D. It has no effect

Answer: (B)

When a bad debt is recorded, you are recognizing that some sales won’t be collected, which adds a bad debt expense to the income statement. Expenses reduce net income, so profit falls. The income statement focuses on revenues minus expenses, and bad debt expense increases the expense side, lowering the bottom line. (The balance sheet would show a reduction in receivables or an increase in the allowance for doubtful accounts, but the question asks about the income statement effect.)

When a bad debt is recorded, you are recognizing that some sales won’t be collected, which adds a bad debt expense to the income statement. Expenses reduce net income, so profit falls. The income statement focuses on revenues minus expenses, and bad debt expense increases the expense side, lowering the bottom line. (The balance sheet would show a reduction in receivables or an increase in the allowance for doubtful accounts, but the question asks about the income statement effect.)