Question

Explain how allowance for doubtful accounts could have a debit balance? Explain in detail.

Answer 1

Allowance for Doubtful accounts will have a beginning or ending Debit balance when the estimated bad debts expense does not equal the actual amount of bad debts expense incurred.Providing an allowance for doubtful accounts presents a more realistic picture of how much of the accounts receivable will be turning to cash.When the allowance account is used, the company is anticipating that some accounts will be uncollectable in advance of knowing the specific account. As a result the bad debts expense is more closely matched to the sale. When a specific account is identified as uncollectable, the Allowance for Doubtful Accounts should be debited and Accounts Receivable should be credited.The allowance for doubtful accounts is based on estimate , it will always show a balance .

In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses.