Allowance For Bad Debt
Barron's Accounting Dictionary:
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Allowance For Bad Debt
Provision for possible uncollectibility associated with accounts receivable. In the balance sheet, accounts receivable, representing gross receivables, is reduced by the allowance account to obtain net receivables-the amount expected to be collected (realizable value). For example, if gross receivables are $100,000 and the allowance account balance is $5000, the current asset section of the balance sheet shows:
The two ways of accounting for uncollectible accounts are the allowance method and the direct write - off method.
The two ways of accounting for uncollectible accounts are the allowance method and the direct write - off method.
| Allowance, Allotment, Allocation | |
| Allowance Method, Alternative Cost, Alternative Minimum Tax (AMT) |
Investopedia Financial Dictionary:
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Allowance For Bad Debt
A valuation account used to estimate the portion of a bank’s loan portfolio that will ultimately be uncollectible. When a loan goes bad, the asset is removed from the books and the allowance for bad debt is charged for the book value of the loan.
Also known as "loan-loss reserve."
Investopedia Says:
The allowance-for-bad-debt account is needed because the face value of a bank's loans are not the actual value, since a certain portion of those assets can be reasonably predicted to go bad.
Increases to the allowance for bad debt are made by periodic loan-loss provisions, which replenish the allowance and are recorded on the income statement as an expense. The use of the allowance method tends to smooth bank earnings, which otherwise might undergo unusual fluctuations when loans that have deteriorated over long periods of time are charged off together in a single period.
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Barron's Accounting Dictionary
Dictionary of Accounting Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
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