Allowance for Doubtful Accounts
Definition
A contra-asset account that reduces accounts receivable by the portion management expects never to collect. Estimated from historical loss rates or an aging analysis, it keeps receivables stated at realisable value instead of face value. Also called the provision for bad debts.
Related Terms in Core Accounting
Asset
A resource the business controls that is expected to produce future economic benefit. Split into current assets, convertible to cash within a year, such as cash, receivables and inventory, and non-current assets like equipment, property and intangibles. One side of the accounting equation: Assets = Liabilities + Equity.
Liability
An obligation to pay money or deliver value to someone else as a result of a past transaction. Current liabilities fall due within a year, for example payables, accrued expenses and short-term debt; non-current liabilities, such as term loans, fall due later.
Equity
The owners residual claim on the business after every liability is settled: Equity = Assets minus Liabilities. Made up of capital contributed by owners plus accumulated retained earnings, less any drawings or distributions. Also called net worth or shareholders funds.
Retained Earnings
The cumulative profit a business has earned since inception, less every dividend or distribution paid out. It sits in equity on the balance sheet and is the link between the profit and loss statement and the balance sheet each period.
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