Bad debt expense and Allowance for doubtful accounts?

Question

From the four choices provided, select the one correct statement.

Can't find the answer in my financial accounting book, please advise?

Bad Debts Expense is a real account and remains open at the end of the fiscal period while Allowance for Doubtful Accounts is a nominal account and is closed at the end of the fiscal period.

Bad Debts Expense and Allowance for Doubtful Accounts are both nominal accounts and closed at the end of the fiscal period.

Bad Debts Expense is a nominal account and is closed at the end of the fiscal period while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period.

Bad Debts Expense and Allowance for Doubtful Accounts are both real accounts and neither are closed at the end of the fiscal period.

Answer 1

The third answer is correct.

Bad Debt Expense is an expense account, and as such it is closed at the end of the fiscal period. Expense accounts are temporary accounts (also called nominal accounts).

Companies that use the allowance method for bad debts use the contra current asset account Allowance for Bad Debt. As such, it appears on the balance sheet. Balance sheet accounts are permanent accounts (also called real accounts), and they remain open at the end of the fiscal period.