Accounting Dictionary

Allowance for Doubtful Accounts

The allowance for doubtful accounts is an estimate of how much of your accounts receivable will not be collected. Anytime you allow customers to charge their purchases there will be some who can’t or won’t pay what they owe. Companies need to know how much cash they will be receiving, so they estimate the amount using the allowance for doubtful accounts.

There are two ways to calculate the allowance for doubtful accounts: aging and percent of sales. The allowance for doubtful accounts is a contra account because it decreases the asset accounts receivable. If your accounts receivable was $60,000 and your allowance for doubtful accounts was $4000, your net realizable value would be $60,000 -$4000 or $54,000. Another name for allowance for doubtful accounts is the allowance for Uncollectible accounts.

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