What is the difference between reserve and allowance?
Perhaps 50 years ago, accountants in the U.S. used Reserve for Bad Debts as the title of the contra account associated with Accounts Receivable or Loans Receivable. They also used Reserve for Depreciation as the title of the contra account associated with plant assets. The use of the word reserve led some readers of the financial statements to conclude that money was set aside for replacing plant assets or the uncollectible accounts or loans. To avoid this misunderstanding, the accounting profession recommended that the word reserve have a very limited use. Accountants now use Allowance for Doubtful Accounts or Allowance for Bad Debts instead of Reserve for Bad Debts. In the case of plant assets, Accumulated Depreciation is used in place of Reserve for Depreciation.
Comments
6 Responses to “What is the difference between reserve and allowance?”
Leave a Reply
 | Free updates with your feed reader (or) receive our monthly Q&A newsletter by filling out the form below: |
Accounting Cheat Sheet
Receive our popular 15-page Cheat Sheet at no cost when
you join our free newsletter:
|
We keep your email address 100% safe and secure.
Most Recent Questions
- What is the meaning of sundry and sundry debtors?
- If an accrual adjusting entry increases an expense and a liability, how does the balance sheet remain in balance?
- What is the difference between liquidity and liquidation?
- What is the meaning of pro rata?
- What is the difference between financial accounting and management accounting?
- What is the difference between accounts payable and accounts receivable?
- In a bank reconciliation, what happens to the outstanding checks of the previous month?
Questions by Category
- Debits and Credits
- Depreciation
- Financial Accounting
- Financial Ratios
- Improving Profits
- Income Statement
- Inventory and Cost of Goods Sold
- Lower of Cost or Market
- Manufacturing Overhead
- Nonmanufacturing Overhead
- Payroll Accounting
- Present Value of a Single Amount
- Present Value of an Ordinary Annuity
- Standard Costing
- Stockholders' Equity
Why AccountingCoach.com?
AccountingCoach.com is designed to help people without an accounting background easily understand accounting concepts at no cost.
By investing thousands of hours, we have created clear and concise accounting information for both business people and students of all ages.
Read 1,200+ Visitor Testimonials
Thank you for giving me information about most tricky questions.
What are the types of depreciation?
How can we prepared the balance sheet and trial balance?
I have just concluded working on the balance sheet of a company and it turns out that on the liability and equity side of the balance, there is a negative reserve. I believe its a capital reserve. My question is, can it be possible to have a negative reserve? if yes, what is the implication of that to the company? if no, could it be that the negative “reserveâ€shown in the balance sheet is actually under a wrong heading? Please advice. Thanks
i want format. cost of machine. topic (depreciation)
i want to know that what is difference between provisions & reserves
i want to know how provision for bad debts and depreciation are treated in the final accounts