allowance for bad debts

allowance for bad debts
A reduction in the value of *accounts receivable. One or more *general ledger accounts are used to record allowances for bad debts, which represent the value of accounts receivable whose ultimate collection is in doubt. The allowance may be for specific accounts receivable balances, or it can be a general allowance based on a percentage of accounts receivable. In the latter case, an *aging of balances allows different allowance rates to be applied on the basis of receivables’ overdue dates. The allowance for bad debts is *offset against accounts receivable in the *balance sheet, and movements on the allowance are reflected in the *income statement. The creation of an allowance suggests that the corresponding customer balance may ultimately be received (i.e., the receivable is doubtful rather than irrecoverable). Allowances for bad debts are reversed when initially doubtful balances are subsequently collected. Where a receivable is known with certainty to be irrecoverable (e.g., if a customer is *bankrupt), the balance is normally eliminated by a *write-off.

Auditor's dictionary. 2014.

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