Question

explain how contractual allowances will impact the budget preparation process.

Answer 1

Contractual allowances refers to the difference between the billing amount and actual paid amount taking into consideration reimbursement from insurance companies as the reimbursement amount is generally less than the billing amount. Therefore contractual allowances are created due the difference between the billing amount and the reimbursement amount  Organizations create contractual allowances in order to create a fund of amount which might not be recovered or received by their customers.

While preparing Budget process Contractual allowances will impact the same as other allowance accounts are created for example Allowance for Bad & Doubtful debts. These allowance will reduce the amount in the Asset side of the balance sheet while preparing financial statements of the company.

While preparing budget, accounting managers need to keep certain amount or percentage of funds as contractual allowance from the total sales revenue hence it will reduce the total sales revenue during the year as per accounting standards and policies determine by the company policies and management. They need to make a account for providing for allowance for funds which not be received or recovered from their customers during a year as per Accounting Standards.