Allowance For Bad Debt
Also, called the "allowance for doubtful accounts", which is a bit more of a positive take on a gloomy topic. Banks record their estimates on loans they predict will go into default and not be repaid using the allowance for bad debt account.
Accountants must have balanced balance sheets (or they wouldn't be called balance sheets). The allowance for bad debt is a category accountants use to balance their sheets. Say a bank loans out $10,000 and estimates that 5% of the loans will go into default. The bank's accountants will enter $500 under the category of "bad debt expense" as a debit in accounts receivables, and $500 credit as an allowance for bad debt. So, basically, the allowance for bad debt is a way to offset the bad debt estimate. It's like a reserve in case a customer doesn't pay up.
Here's how it works if a customer actually doesn't pay up: Say in our example, a customer defaults on $100. This will be recorded as a $100 credit in accounts receivable to lower this amount, and as a $100 debit in the allowance for bad debt account. Seems a little counterintuitive, but it works.
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Finance: What are Aging Receivables/an A...70 Views
Finance a la shmoop what are aging receivables and an allowance for doubtful accounts
A lot of people don't realize this but that was the original title of Moby [Book title changes to Moby Dick]
Dick yeah all right My aching receivables that's your
balance sheet talking well wine is about the only thing that gets better with age [Wine poured into a glass]
and even it has its limits there yeah aliens go ahead and pour yourself a
glass all right when receivables a balance sheet item
that lives right here get old they - generally speaking get bad note how much
higher the probability of non collection called deadbeat-ism gets as the age of
the receivables increases well generally speaking bills that are gonna get paid
generally get paid fast or at least on time and those that don't have to be
tracked well best guesses matter in accounting so coming to an actual
predicted rational and reasonable number is a big deal and you can see that in [Man discussing receivables]
this case the spread between the legally owed money and the amount likely to be
collected is a pretty big spread well the decline hits the assets side of the
balance sheet in the form of accounts receivable here being lower and [Accounts receivable column highlighted]
eventually when a bad debt is finally recognized as a deadbeat bad debt never
to be collected and is dead dead dead well then it simply gets written off on
the income statement or well said another way it goes away as a sale that
never happened so that's aging receivables in a nutshell and yeah this [Aging receives inside a nut]
is the one time you don't need to respect the elderly [Man trips over elderly man and gives thumbs up]
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