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.

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.
References in periodicals archive ?
Will they pay their bad debt and should we put our bad debt allowance up or down or leave it alone?
Gross receivables serviced at the end of the quarter decreased 5.4% to $5.94 billion, while write-offs fell 31.4% to $127 million, well within the bad debt allowance of $430 million.
The improvement in sales and marketing expenses was a result of lower product demonstration costs, lower bad debt allowance requirements due to accounts receivable collection and aging improvement, and a quarter over quarter decline in sales expenses associated with the Company's Spine business following the restructuring of its Americas sales organization in 2009.
The company said it is currently evaluating whether it needs to record expenses related to the impairment of investments made by its Japanese subsidiary and bad debt allowance related to accounts receivable from its Chinese distributor.
Baker Corporation has sold goods to Charlie Company for more than 15 years and never once had a problem with collections; hence, Baker makes no bad debt allowance.
Comment: The absence of a bad debt allowance means that the estimate is zero, SOP 94-6 requires disclosure when a change in an estimate would be material (judgement required).
Gross receivables serviced at the end of the year declined 14.3% to $6.84 billion, and net write-offs fell 23.8% to $1.25 billion--still exceeding the bad debt allowance of $1.02 billion.
In order to limit the time needed to complete the MES instrument to no more than fifteen minutes, three of the eight scenarios that are most suited to accounting practices were selected, after consulting one faculty member in accounting in the US and another one in Taiwan, to include "foreign bribe", "loan officer friend", and "bad debt allowances" (Cohen et al., 1993, 1996).