What type of adjustment would be made for bad debts?

The adjustment for bad debts involves acknowledging that certain accounts receivable may not be collectible, thereby requiring an adjustment to reflect a more accurate picture of the financial situation. This is done through the process of estimating uncollectible accounts.

The correct procedure is to debit the bad debt expense, which reflects the cost of those uncollectible debts. This action effectively reduces net income, as it accounts for the financial loss from potential non-collection of receivables. At the same time, a credit is made to accounts receivable, which decreases the total amount of receivables reported on the balance sheet. This adjustment ensures that the financial statements provide a more realistic view of the company’s assets and expenses.

Recognizing all previous receivables as paid is not an adequate approach since it does not accurately represent the financial condition of the company and could mislead stakeholders. Adjusting accounts payable and income tax expense is unrelated to the treatment of bad debts. Lastly, stating that no adjustment is necessary ignores the reality that not all receivables will be collected, and this could lead to an overstatement of assets on the balance sheet. Thus, debiting bad debt expense and crediting accounts receivable aligns with proper accounting principles for handling uncollectible accounts