allowance for doubtful accounts

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Allowance for Doubtful Accounts

Extra funds from sales, or another source, set aside in order to pay off bad debt if and when it arises. The allowance helps a company ward off any potential cash flow problems should its credit sales not be repaid as expected. On financial statements, it is important to note that an allowance for bad debts exists for fiscal conservatism and not because one expects a large amount of bad debt to accumulate. An allowance for doubtful accounts is also called a cushion. Banks call these funds the loan loss reserve. See also: Savings account.
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allowance for doubtful accounts

A balance-sheet account established to offset expected bad debts. If a firm has made a sufficient provision in its allowance for doubtful accounts, reported earnings will not be penalized by bad debts when the bad debts occur. If uncollectible accounts are larger than expected, however, the firm will have to increase the size of the account and reduce reported income. Also called allowance for bad debts, reserve for bad debts.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Increased Visibility in Water Regulation: The framework approved by AEEGSI for 2016-2019 follows the same pillars applied in 2014-2015 and defines that tariffs should cover both opex and capex, with volume risk removed through balance payments and a rising allowance for bad debts. The (real, pre-tax) return on regulated asset base (RAB) has been reduced by around 70bp (from 6.06%), but the new calculation methodology gives more stability to the return, delinking it from the Italian 10-year government bond yield.
What is good about the restatement is that the adjustments were largely focused on non-cash expenses such as unrecorded depreciation expenses and provision of allowance for bad debts and not on aggressive revenue recognition policies.
On the other hand, the KDB's provision ratio - the ratio of allowance for bad debts - plunged from 120.7 percent in 2014 to 78.6 percent last year.
As of December 31, 2013, cash and accounts receivable, net of allowance for bad debts, totaled USD2.34m; credit available under the company's USD750,000 bank line totaled USD750,000; and the company had only USD153,141 in long term liabilities.
Consequently, in this paper an inventory-credit period decision model has been developed within the DCF framework with an explicit consideration of allowance for bad debts along with accounts receivable carrying cost.
As a result, they often mechanically calculate taxable income by adjusting book income for any change in the "allowance for bad debts" account from the prior year.
Allowance for Bad Debts: The division has a $200,000, 7 percent note receivable from a customer who has, for the last ten years, purchased large volumes of the division's products.
As I reviewed the customer accounts the assistant had selected for testing, I noticed an unusual one: a $90,000 credit to accounts receivable control, with an offset to the allowance for bad debts. The explanation read: "To adjust the general ledger to the accounts receivable trial balance at the branch." I asked the assistant why an adjustment that significant was necessary.
These are accrued warranty expenses and the allowance for bad debts. Excessive accruals or allowance could be used by management to generate misleading statements."
Once, for example, the auditors thought the allowance for bad debts at my company was too low.
Assets Cash $70,000 $10,000 Accounts receivable 80,000 100,000 Less: allowance for bad debts (5,000) (10,000) Interest receivable 0 5,000 Merchandise inventory 120,000 80,000 Prepaid interest 5,000 0 Property, plant and equipment 550,000 650,000 Less: accumulated depreciation (145,000) (160,000) Long-term certificates of deposit 200,000 125,000 Total assets $875,000 $800,000

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