Microsoft Allowance for Doubtful Accounts Example Accounts Receivable, net = Accounts Receivable, gross – Allowance for Doubtful Accounts.Most balance sheets report them separately by showing the gross A/R balance and then subtracting the allowance for doubtful accounts balance, resulting in the “Accounts Receivable, net” line item. Note that the accounts receivable (A/R) account is NOT credited, but rather the allowance account for doubtful accounts, which indirectly reduces A/R. Allowance for Doubtful Accounts → Credit.The journal entries for recording the uncollectible A/R are as follows: Management projects the amount of bad debt by referencing historical data such as the following: The most prevalent approach - called the “percent of sales method” - uses a pre-determined percentage of total sales assumption to forecast the uncollectible credit sales. Allowance for Doubtful Accounts: The amount of accounts receivable (A/R) estimated to be later written off as uncollectible.Accounts Receivable (A/R): The total dollar amount of unmet cash payments from customers that paid on credit for revenue already “earned.”.The allowance method estimates the “bad debt” expense near the end of a period and relies on adjusting entries to write off certain customer accounts determined as uncollectable. Allowance Method: Journal Entries (Debit and Credit) bad debt expense acts as a “cushion” for losses). Otherwise, it could be misleading to investors who might falsely assume the entire A/R balance recorded will eventually be received in cash (i.e. In effect, the allowance for doubtful accounts leads to the A/R balance recorded on the balance sheet to reflect a value closer to reality. The projected bad debt expense is matched to the same period as the sale itself so that a more accurate portrayal of revenue and expenses is recorded on financial statements. GAAP allows for this provision to mitigate the risk of volatility in share price movements caused by sudden changes on the balance sheet, which is the A/R balance in this context. The actual payment behavior of customers, or lack thereof, can differ from management estimates, but management’s predictions should improve over time as more data is collected. The allowance reserve is set in the period in which the revenue was “earned,” but the estimation occurs before the actual transactions and customers can be identified.
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