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May 26, 2006

What is the Allowance for Doubtful Accounts?

The allowance for doubtful accounts is a balance sheet account that reduces the reported amount of accounts receivable. (A change to the balance in the allowance for doubtful accounts also affects bad debt expense on the income statement.) Providing an allowance for doubtful accounts presents a more realistic picture of how much of the accounts receivable will be turning to cash. After all, a company selling products (or services) on credit to thousands of customers will likely have a few customers who will not be able to pay the full amount they owe to the company.

By recording an amount in the allowance for doubtful accounts it will also mean that the bad debt expense will be reported closer to the time of the sales–instead of waiting until the account is determined to be uncollectible. Hence, the matching principle is carried out more effectively.

The allowance account and the related bad debt expense is encouraged for financial reporting; however, it is not acceptable for income tax reporting. The Internal Revenue Service prefers that any expense for bad debts be deducted later–when an account is actually written off as uncollectible.

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11 Responses to “What is the Allowance for Doubtful Accounts?”

  1. Frances Hallman on March 20th, 2007 12:58 pm

    Does GAAP allow for the use of the percentage of sales methoug of calulating doubltful accounts and the percentage of receivables method at the same time? Why or why not?

  2. Fahad on August 20th, 2007 3:34 am

    Could any explain to me how is an increase in a provision for an allowance for doubtful debts accounts is show?

    Also how is it related to bad debts and past allowances in both the profit and loss account as well as in the balance sheet.

    Thank you for your kind attention.

  3. Sara on October 18th, 2007 11:04 am

    How would you derive allowance for doubtful accounts, mathematically?

  4. reviews on December 12th, 2007 5:43 am

    Hi from New York And thanks for the web site. It was just the thing I had been looking for. It has helped me no end. Thanks again

  5. saleem hunzai on February 19th, 2008 12:56 am

    i am looking for more imformation about the provision of account receiveable

  6. malou on November 20th, 2008 10:57 am

    can u pls give me the sample of bank recon that the beginning balance of the bank is negative and also how can i adjust the book balance intthe accounting software that appear in the bank but no records in the books

  7. Taata on June 3rd, 2009 4:35 pm

    …pls can you explain more of how to process the cash flow statement, I mean, is there any steps when preparing a cash flow statement with the given information,

  8. Taata on June 3rd, 2009 4:41 pm

    …pls can you help me more on the topic of receivables, the procedures to recording it when there is a bad debt occured and also the allowance for doubtful debts at the begining of the period.

  9. dins on July 3rd, 2009 12:49 am

    thanks for this website i learn a lot especially im a bookkeeper..

    God bless

  10. Zory on July 31st, 2009 11:22 am

    Can you please tell me how to find exactlly the ratio of the allowance for uncollectable accounts balance to the accounts receivables balanse?

    Thank you in advance!

  11. Ravinder Toor on October 6th, 2009 7:54 pm

    Hi , I am from Australia thanks a lot for this website.Its the thingh iI was desperatly looking for .Its really a friend indeed…..and helped me no ends .
    God bless

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