0
The Allowance for Doubtful Accounts is a general ledger account set up to estimate the dollar amount of accounts receivable that a business does not expect to collect from customers.
It works this way: A business sells 4 widgets to Customer A for $20.00 on credit and 1 widget to Customer B for another $5.00 on credit (assume that these two sales are the only sales that the company makes in the entire accounting period). Until one of the customers pays, the company has total Accounts Receivable of $25.00 ($20.00 due from Customer A and $5.00 from customer B).
However, the business must take into account the likelihood that some customers who owe it money will not pay. For example, a customer may go out of business before paying. So the business owner wants to estimate how much of its total Accounts Receivable he thinks will actually be collected. He estimates the total amount owed by customers who probably will not pay (but remember that they might pay, so he doesn't want to completely take the debt off the books yet), and he records that amount as a debit to Estimated Bad Debt account, with the credit going to a separate account called Allowance for Doubtful Accounts.
When one combines the debit balance shown in the Accounts Receivable account and the credit balance shown in the Allowance for Doubtful Accounts, the net result is the amount of total customers' debt that the business' management realistically believes the business will be able to collect.
DR Balance in Accounts Receivable Account
net of
CR Balance in Allowance for Doubtful Accounts
= the net amount that the company expects to collect as of the balance sheet date
(and this is the single amount that is reported as "Accounts Receivable" on the company's balance sheet.)
Accounts Receivable is classified as a current asset, because it is assumed that the NET collectible receivables will be collected within one year of the balance sheet date.
Allowance for Doubtful Accounts is a valuation account used to estimate the dollar amount of uncollectible Accounts Receivable as of the balance sheet date.
A general ledger account and its associated valuation account (if any) are always classifed in the same way. Accordingly, since Accounts Receivable is a current asset (which is generally the case), so is its related valuation account, i.e., Allowance for Doubtful Accounts.
Wiki User
∙ 14y ago
Add your answer:
Earn +20 pts
Allowance for doubtful accounts is listed on the balance sheet under the caption of what?
current asset
What kind of an account (asset liability etc.) is Allowance for Doubtful Accounts and is its normal balance a debit or a credit?
What kind of an account (asset, liability, etc.) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit?
Allowance for doubtful accounts is what type of account?
Asset Contra account to Accounts Receivable (Contra-Asset). Normal balance is credit.
What is the type of account in normal balance of allowance for doubtful accounts?
contra asset, credit
On a balance sheet what does contra asset allowance for doubtful accountsrepresent Is it current asset fixed asset or investment?
see the site. http://ccba.jsu.edu/accounting/BADDEBTS.HTML
Is allowance for doubtful accounts a liability?
No an asset it is created as an deduction from acc. rec. and acc. rec. is counted as an asset which is Dr. and so Allowance f d.d. is counted as an Cr. but its not a liability. if it must be counted as an asset or liability, u can treat it as an opposide of asset.
Is Allowance For Doubtful Accounts and Accumulated Depreciation Similar?
Yes.... and no. I guess it depends how you are meaning this, specifically. They are both "contra-asset" accounts, however, they are for different things. Allowance for Doubtful Accounts ("ADA") is the estimated amount of your accounts receivable (the money that people owe you) that you suspect will not be paid. Accumulated Depreciation is the total depreciation on your asset (building, equipment, etc. -- NOTE: Land does NOT depreciate.) since you record the asset at its historical cost (the amount you paid for it). So, while both are contra-asset accounts, they have very different uses behind them.
Is provision for doubtful debt a current liability?
Provision for doubtful debt is current asset which is created as a reduction in accounts receivable balance and which is adjusted at actual bad debt.
Why bad debts comes on asset side?
The Allowance for Doubtful Account is on the asset side of the balance sheet because this account is a contra account to accounts receivable. In accrual accounting there is an assumption that not all receivables will be paid.
How do you report a change in accounting estimate?
The changes in accounting estimates are known to be as Contra Asset Accounts. These are negative asset accounts by nature. They are deducted from the actual book value of an asset at the end of a fiscal period. The amount left over after the deduction is known to be a net book value of that particular asset. This net book value helps a company realize a profit or loss when that particular asset is sold out. The contra asset account is presented under the asset on the balance sheet. The amount credited while reporting a change is a mere estimation which is calculated by the method adopted by the company.Examples of those methods could be:Straight Line Method - DepreciationDouble Declining Balance - DepreciationDays Outstanding - Allowance for Doubtful AccountsPercentage of Accounts Receivable - Allowance for Doubtful Accounts
Do you close out allowance for doubtful accounts at end of year?
Allowance for doubtful accounts is a contra-asset account, but it relates for bad-debt expense. When increasing bad debt expense, you credit ADA and debit BDE. Allowance for doubtful accounts is just estimating how much you will need for these accounts, and bad debt expense is saying "see, i knew this would go bad" then you credit ADA. Bad debt expense does need to be closed out though! So... Debit ADA Credit Accounts receivable (This is when expenses are written off) then Debit BDE Credit ADA Bad debt expense needs to be closed out, by crediting expenses and then debiting Retained Earnings.
Definition of contra assets?
Contra assets are asset accounts with creditbalances. (A credit balance in an asset account is contrary-or contra-to an asset account's usual debit balance.) Examples of contra asset accounts include: * Allowance for Doubtful Accounts * Accumulated Depreciation-Land Improvements * Accumulated Depreciation-Buildings * Accumulated Depreciation-Equipment * Accumulated Depletion * Etc. source: http://www.accountingcoach.com/online-accounting-course/05Xpg01.html -- amir
