Allowance For Doubtful Accounts
An allowance for doubtful accounts is a contra-asset account that estimates the portion of accounts receivable that may not be collected, reducing gross receivables to net realizable value. It is used under the allowance method to match bad debt expense to the period in which the related revenue is recorded.
Example: For example, a company with 500,000 in accounts receivable estimates that 2% may be uncollectible, recording a 10,000 bad debt expense and increasing the allowance by 10,000, which reduces net accounts receivable.
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