A Brief Understanding of the Allowance Accounting
Allowance accounting is a very well known aspect of accounting in the present day business. All the businesses are required to select a form of accounting method. The two major methods of accounting are the accrual basis accounting and the cash basis accounting. In the cash basis accounting the income is registered when the payment exchanges hands, whereas in the accrual basis of accounting the income is generated when the payment is due in near future but has not yet been received. In the accrual basis of accounting the amount that is expected to be received is termed as the accounts receivable.
In many cases there might be situations when the accounts receivable is not being received or it is sure that there would be delay in receiving the amount. Under such situations it is quite likely that the company would set up an allowance for such doubtful accounts (a contra- asset account) and the debit goes to the bad debt expense. In order to do the allowance accounting, the company uses a formula. The company, based on the experience would know that a certain percentage of their outstanding accounts receivable would not be collectible. It would be uncollectible. This experience is then applied with the help of a formula to calculate the dollar amount of the uncollectible and would set up an allowance account.
The formula used by the company might be very simple or quite complicated. At the end of each period the allowance is recalculated and adjusted accordingly with the up or down the bad debt expenses.
The allowance accounting is an offspring of the new age of accounting. It is very helpful to the organizations when there is a specter of doubt about receiving the accounts receivable. Although the allowance accounting is yet to reach a very advanced stage yet it is powerful enough to make sure that the companies are able to keep a tack on the money that is owed to them.