HumanBookkeeping.com™ can help. We are expert bookkeepers that can help your small business with its bookkeeping needs. Here’s a short explanation of what Allowance for Doubtful Accounts means. If we can be of more help explaining what Allowance for Doubtful Accounts is or if we can help you with any of your small business bookkeeping needs, give us a call at 888-552-6657.
HumanBookkeeping.com™ provides a way for small businesses to have outsourced bookkeeping at a significant savings. We provide our clients with pre-printed envelopes. You stuff the envelopes and our expert team does the rest with detailed reports and timely compliance support. Not to mention, you now have a team of experts at your disposal should you have questions or last-minute needs. Let’s start with answering what Allowance for Doubtful Accounts means:
There are two methods for a small business to record bad debt. The first method is to simply write-off bad debt when it occurs. As a result of this method, your income statement and balance sheet may be severely impacted period to period as bad debt write-offs can vary drastically. To remove this fluctuation, accountants created a contra account, “Allowance for Doubtful Accounts.” With this account, a bookkeeper will estimate the amount of sales that will result in bad debt for each period. This estimate is recorded as bad debt expense on the income statement, and as a reduction of net accounts receivable value on the balance sheet through the Allowance for Doubtful Account. When a bad debt is written off, the bookkeeper reduces the accounts receivable account, but also reduces the contra asset account, Allowance for Doubtful Accounts. As a result of this method, the balance sheet and income statement are not both affected by actual bad debt write-offs. This method reduces spurious fluctuations of financial reports, and provides managers with a clearer picture of the business.
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