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What is Allowance for Uncollectible Accounts?

The Allowance for Uncollectible Accounts, also known as the Allowance for Doubtful Accounts or Bad Debt Allowance. It is a contra-asset account used in accounting to estimate and record the portion of accounts receivable that is expected to be uncollectible. It is created to reflect the reality that not all customers may fulfill their payment obligations, and some accounts may become uncollectible over time.

Why is it important or used in Accounting?

Allowance for Uncollectible Accounts is important in accounting for several reasons:

Advantages of Allowance for Uncollectible Accounts:

Disadvantages of Allowance for Uncollectible Accounts:

Example of Allowance for Uncollectible Accounts for a Wholesaler or Retailer Business:

Suppose a retailer sells electronic appliances to various customers on credit. At the end of the accounting period, the retailer reviews its accounts receivable. The retailer estimates that 2% of its total credit sales, or $ 500,000, will likely be uncollectible.

  1. Calculate the Allowance:
  1. Journal Entry to Create the Allowance:

This journal entry records the estimated uncollectible amount as an expense on the income statement. This ensures that the financial statements accurately reflect the expected collectible amount of accounts receivable.

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