3 What is the allowance for doubtful accounts 4 Describe the

3.

What is the allowance for doubtful accounts?

4.

Describe the allowance method for writing off a specific account receivable.

5.

Your client just called their accountant (you). They have identified a customer account receivable

for $4,000 that should be written off (the company went bankrupt). The client asked how will

this write off impact their net income?

a.

Explain to your customer (and me) why there is no impact to net income.

b.

Why might you tell the customer that “eventually” there could be an indirect impact of

the $4,000 write-off on net income

Solution

ANSWER

Allowance for doubtful accounts-

Allowance for doubtful account is a an account which reduces the amount of the accounts receivable. It is a balance sheet account.

The Allowance for Doubtful Accounts is a contra asset account. A contra account is used instead of reducing accounts receivable directly because at the time of the adjusting entry, the company does not know which customers will not pay.

So , it provides more realistic picture of amount the accounts receivable which will turned into the cash.