Allowance for doubtful accounts
Definition
Allowance for doubtful accounts is a contra-asset account on a company's balance sheet that reduces the total amount of receivables to reflect those expected to be uncollectible. It helps in providing a more accurate picture of a company's financial health by anticipating potential losses from bad debts.
5 Must Know Facts For Your Next Test
- The allowance for doubtful accounts is estimated based on historical data and management's judgment.
- This account ensures that the revenue reported on the income statement is more accurately matched with the expenses incurred.
- Adjusting entries for this allowance are typically made at the end of each accounting period.
- An increase in the allowance for doubtful accounts will decrease net accounts receivable on the balance sheet.
- Methods such as percentage of sales and aging of receivables analysis are commonly used to estimate the allowance.
Review Questions
- Why is it important to have an allowance for doubtful accounts?
- How does an increase in the allowance for doubtful accounts affect the balance sheet?
- What methods can be used to estimate the allowance for doubtful accounts?
"Allowance for doubtful accounts" appears in:
Subjects (1)
Study guides (1)
Related terms
Bad Debt Expense: Expense recognized when a receivable is deemed uncollectible.
Contra-Asset Account: An account that reduces asset balances, such as accumulated depreciation or allowance for doubtful accounts.
Aging of Receivables: A method used to estimate uncollectible accounts by categorizing receivables based on how long they have been outstanding.
