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Allowance method is the method of accounting for uncollectible allows for a more accurate balance for assets on the balance sheet.
What is an allowance method?
The allowance technique often refers to one of the two methods for disclosing the expense for bad debts incurred as a result of a business offering products or services on credit. (The direct write-off approach is an alternative.)
According to the allowance method, a business makes an adjustment entry at the conclusion of each accounting period for the sum of the losses it expects to incur as a result of giving its clients credit. The operational expense account Bad Debts Expense and the contra-asset account Allowance for Doubtful Accounts will both be included in the entry. Later, when a particular account receivable is really written off as uncollectible, the corporation credits Accounts Receivable and debits Allowance for Doubtful Accounts.
In comparison to the direct write-off technique, the allowance method is favored because:
The balance sheet will show a more accurate net amount of accounts receivable that will actually be turned into cash and the income statement will show the bad debts expenditure closer to the time of the sale or service.
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