'Allowance For Doubtful Accounts'
Here, the account Bad debt expense is a normal expense category account whose balance increases with a debit transaction. The other account, Allowance for doubtful accounts is an asset category account, but it is also a contra asset account. This, in turn, creates an entry in a balance sheet account (contra asset account) called allowance for doubtful accounts, The examples below explain and illustrate how a company writes off bad debt and how these accounts impact each other. Allowance for Doubtful Accounts is a valuation account used to estimate the dollar amount of uncollectible Accounts Receivable as of the balance sheet date. A general ledger account and its associated valuation account (if any) are always classifed in the same way.  Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable. The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry may be a percentage of sales or it might be based on an aging analysis of the accounts receivables (also referred to as a percentage of receivables). The Bad Debt Expense is charged to expense right away, and the Allowance for Doubtful Accounts becomes a reserve account that offsets the account receivable of $10,000,000 (for a net receivable outstanding of $9,900,000). The entry is: Later, several customers default on payments totaling $40,000. Accordingly, the company credits the accounts receivable account by $40,000 to reduce the amount of outstanding accounts receivable, and debits the Allowance for Doubtful Accounts by $40,000. 4. Adjust the balance of the allowance account as necessary. If the company above records another $10,000 in service revenue, another journal entry is needed to increase the allowance account. The company debits Bad Debts Expense for $200 and credits Allowance for Doubtful Accounts for $200. Accounting for doubtful debts presupposes credit sales, so begin by recording the sale in the general journal. For example, consider a company that renders $2000 of services to a customer on credit. To record the journal entry, the company debits Accounts Receivable for $2000 and credits Service Revenue for $2000. The allowance for doubtful accounts is a reduction of the total amount of accounts receivable appearing on a company’s balance sheet, and is listed as a deduction immediately below the accounts receivable line item. This deduction is classified as a contra asset account. Later, several customers default on payments totaling $40,000. Accordingly, the company credits the accounts receivable account by $40,000 to reduce the amount of outstanding accounts receivable, and debits the Allowance for Doubtful Accounts by $40,000. Record the journal entry to create the doubtful account allowance. In the example above, assume the company decides to estimate noncollectable accounts as 2 percent of total service revenue. The allowance needed is therefore (0.02 * 2000), or $40. To record the journal entry and establish the allowance account, the company debits Bad Debts Expense for $40 and credits Allowance for Doubtful Accounts for $40. Accounting for doubtful debts presupposes credit sales, so begin by recording the sale in the general journal. For example, consider a company that renders $2000 of services to a customer on credit. To record the journal entry, the company debits Accounts Receivable for $2000 and credits Service Revenue for $2000. DEFINITION of 'Allowance For Doubtful Accounts'. A contra-asset account that records the portion of a company's receivables, which it expects may not be collected. The allowance for doubtful accounts is only an estimate of the amount of accounts receivable which are expected to not be paid. For example, the company may identify that it expects 4% of its sales to become bad debt, and thus it will adjust the allowance for doubtful accounts each quarter to ensure that this expected loss is reflected on the company's financial statements. Writing off bad debt. Before there can be a bad debt expense or allowance for doubtful accounts, there must be an account receivable. An account receivable is an amount that is owed to an entity, usually by one of its customers as a result of a recent sale or the ordinary extension of credit. This, in turn, creates an entry in a balance sheet account (contra asset account) called allowance for doubtful accounts, The examples below explain and illustrate how a company writes off bad debt and how these accounts impact each other.
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what kind of account is allowance for doubtful accounts