Question

What is the difference between Accounts Receivable and the Allowance for Doubtful Accounts and when the relationship can be considered reasonable

Answer 1

Accounts receivables arises when a company sells goods or services to customers on credit. This means the customers had been billed or invoiced for the products or services sold by the company, but these customers are not making immediate payments of the invoices.In this case the transactions are to be recorded as Accounts receivables,

These Accounts Receivables are current assets to be debited when increases and to be credited when decreases. Accounts receivables represents the amount collectible from customers.

In practice all customers may not pay the invoice amount on time, Some good ones pay their dues on time, but the others may not only delay payment of their invoices but try to avoid payment.In this case, Allowance for doubtful accounts is created, which is a contra asset, that reduces the value of Accounts Receivables shown in balance sheet. Allowance for Doubtful accounts represent the uncollectible amount from customers or the amount that the company does not expect to receive from cusomers. It is reserve for bad debts expense.The bad debts are to be incurred at an uncertain time in future.So Allowance for these bad debts is created as a (IAS 37)reserve, which is a liability. So Allowance for doubtful accounts is  credited for increase and debited for decrease.

The relationship between Accounts Receivables and Allowance for doubful accounts is considered reasonable when bad debts are recovered to some extent(not fully), thereby reducing the accounts receivables.