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Lesson Posted on 02 Feb Tuition/BCom Tuition

Method Of Showing Accounts Receivable On Balance Sheet Under Allowance Method

Khushboo B.

I am having an experience of 5+ years in teaching Maths/Accounting/Economics/Statistics/Costing/Taxation/Law/Business...

Allowance Method: Under the Allowance Method, the company makes an estimate, on the basis of some past experiences or on the basis of published industry averages, of debts which may not be realizable. As it is not yet recognized against a specific customer as to who will not be able to pay the debt,... read more

Allowance Method:

Under the Allowance Method, the company makes an estimate, on the basis of some past experiences or on the basis of published industry averages, of debts which may not be realizable. As it is not yet recognized against a specific customer as to who will not be able to pay the debt, a contra-asset account named Allowance for Bad or Doubtful Debt Account will be created. This allowance for bad or doubtful debt account will be shown as a deduction to the Accounts Receivable Account on the asset side of Balance Sheet.

 

To Determine:

Method of showing Accounts Receivable on the Balance Sheet under Allowance Method.

 

Solution:

Generally, companies use two methods to record bad debts, Allowance Method and Direct Write off Method.

Under Allowance Method Net Realizable Value of Accounts Receivable is shown on the Balance Sheet after deducting Allowance for Doubtful Debt Account from it.

 

Explanations:

Under the Allowance Method, the company makes an estimate, on the basis of some past experiences or on the basis of published industry averages, of debts which may not be realizable in future. As it is not yet recognized against a specific customer as to who will not be able to pay the debt, a contra-asset account named Allowance for Bad or Doubtful Debt Account will be created. This allowance for bad or doubtful debt account will be shown as a deduction to the Accounts Receivable Account on the asset side of Balance Sheet.

For this expected value of Bad Debt, an adjustment entry is required to be made debiting Bad Debt Account and crediting Allowance for Bad Debt Account. For example, if at the end of an accounting period, a company makes an estimate that $ 225 in Accounts Receivable will become unrealizable, then the adjustment entry would be as follows:

Bad Debt Expense A/C-------------------------------------Dr.                               $225

            To Allowance for Bad Debt Account                                                            $225

And, this Allowance for Bad Debt Account will be shown as a deduction to Accounts Receivable in the Balance Sheet. The total of Accounts Receivable Account will remain unaffected even after making this adjustment entry.

When this estimated value is identified against a specific customer, then it shall be written off against the Allowance Account already made. For example, if the above-mentioned amount of $225 becomes recognized against a specific customer, say, Mr. X, then the adjustment entry would be-

Allowance for Bad Debt Account-----------------------------------------Dr.                     $225

            To Accounts Receivable – Mr. X A/c                                                                         $225

 

Conclusion:

Thus, under allowance method, the net realizable value of Accounts Receivable is shown on the Balance Sheet after deducting expected unrealizable value.

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Answered on 05 Feb Tuition/BCom Tuition/Financial Markets and Institutions

Can I do M.Com from private and B.Ed in distance education at same time?

Rizwan Baqai

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You can do private M.Com but B.ed is not provide with distance education and not worth for it.
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Asked on 29 Jan Tuition/BCom Tuition/Financial Markets and Institutions

How many days it would take to complete my all courses?

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Answered on 24 Jan Tuition/BCom Tuition

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Eligibility criteria for B.Com is either 12th pass or Diploma. If you have either, you can certainly do.
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Answered on 28 Jan Tuition/BCom Tuition/Accounting Information Systems

What is Book Keeping?

Priyanka Vijayananth

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Asked on 13 Jan CBSE/Class 11/Commerce/Accountancy CBSE/Class 12/Commerce/Accountancy Tuition/BCom Tuition/Accounting Information Systems

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Answered on 24 Jan Tuition/BCom Tuition

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For admission in B.Com basic eligibility is 12th or Diploma.
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Answered on 06/12/2017 Tuition/BCom Tuition

Apoorva A.

HR Professional

Hi Abdul, Good Afternoon! Hope you are doing well. B.Com degree in HR doesn't have much value or scope. If you take up a job after B.Com you will earn between 10-15k pm. To add value to your CV and also earn and get a better work opportunity, I suggest you do your MBA in HR. It will help you understand... read more
Hi Abdul, Good Afternoon! Hope you are doing well. B.Com degree in HR doesn't have much value or scope. If you take up a job after B.Com you will earn between 10-15k pm. To add value to your CV and also earn and get a better work opportunity, I suggest you do your MBA in HR. It will help you understand and learn more about the HR field. You learn different subjects and will get in depth knowledge of the different HR roles. This will help you make better career choices. P.S: Take out time and prepare for competitive exams to help get MBA admission: like PGCET, KMAT, SNAP( CAT if you wish to try for IIM's) Good luck! read less
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