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Allowance for Doubtful Accounts: Definition and Meaning
Definition
The allowance for doubtful accounts is an estimate of the portion of accounts receivable a business may not collect.
Why It Matters
The allowance helps present receivables more realistically by recognizing that not every invoice may be collected in full. It also encourages management to review customer balances, aging reports, credit practices, collection history, and disputes.
The estimate should be based on appropriate information, which may include historical loss experience, customer-specific facts, aging categories, and current economic conditions.
Example
A company has $100,000 in accounts receivable and estimates that $2,000 may not be collected. It records an allowance for doubtful accounts of $2,000.
Related Terms
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