allowance for doubtful accounts

(redirected from Bad Debt Allowances)

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 ?
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).
For the scenario of bad debt allowances, the US students evaluate the dilemma significantly by justice and egoism, but Taiwanese students evaluate it according to justice, relativism, and deontology.