The more accounts receivable a company expects to be bad, the larger the allowance. Thus, the allowance increases with a credit (creating a decrease in the net receivable balance) and decreases with a debit. As a contra asset account, debit and credit rules are applied that are the opposite of the normal asset rules. Here, the allowance serves to decrease the receivable balance to its estimated net realizable value. The allowance for doubtful accounts is an example of a “ contra account Offset to an account that reduces the total balance to a net amount in this chapter, the allowance for doubtful accounts always reduces accounts receivable to the amount expected to be collected.,” one that always appears with another account but as a direct reduction to lower the reported value. Whenever a balance sheet is to be produced, these two accounts are netted to arrive at net realizable value, the figure to be reported for this asset. or the allowance for uncollectible accounts) reflects the estimated amount that will eventually have to be written off as uncollectible. A second account (often called the allowance for doubtful accounts A contra asset account reflecting the estimated amount of accounts receivable that will eventually fail to be collected and, thus, written off as uncollectible.An accounts receivable T-account monitors the total due from all of a company’s customers.However, that level of certainty is rarely possible. If the balance to be collected was known, one account would suffice for reporting purposes. Is the amount reported for accounts receivable actually the net of the total due from customers less the anticipated amount of doubtful accounts?Īnswer: Yes, companies maintain two separate T-accounts for accounts receivables but that is solely because of the uncertainty involved. The two are then combined to arrive at the net realizable value figure that is shown within the financial statements. Interestingly, the first is a fact and the second is an opinion. One is the sum of all accounts outstanding and the other is an estimation of the amount within that total which will never be collected. Question: Based on the information provided by Dell Inc., companies seem to maintain two separate ledger accounts in order to report accounts receivables on their balance sheet at net realizable value. Prepare the adjusting entry necessary to reduce accounts receivable to net realizable value and recognize the resulting bad debt expense.Know that bad debt expenses must be anticipated and recorded in the same period as the related sales revenue to conform to the matching principle.Understand the reason for reporting a separate allowance account in connection with accounts receivable.At the end of this section, students should be able to meet the following objectives:
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