Question

Why are the balances of Bad Debts Expense and Allowance for Doubtful Accounts virtually never equal?

Answer 1

As per accounting definition Bad debts are those amount which are not recovered , as they are no hope of recovery of those amount , those amount are treated as bad debts .

bad debts expenses occurred when we given credit to our customers and our credit is not recovered from our customers , then we show it as  bad debts expense on debit side of income statement .

whereas allowance For Doubtful accounts is estimation of accounts receivables , Allowance od doubt allowance are deducted from account receivables shown in balance sheet , as this is merely estimation by company that certain % of debtors of company will be defaulter ,

It is contra assets of company where it shown certain amount of account receivables not collectable .

% of sales and aging of accounts is method through which allowance for doubtful accounts are estimated .

for example company has $200000 accounts receivable as on 1 feb 2021 and $10000 as allowance of doubtful debts ,so its estimated by company that it will receive only $190000 as account receivable balance , but as on 28 feb company receive information that $5000 more will not be receivable by company, now company will make an adjusting entry by debiting Bed debts expense a/c by $5000 and credit $ 5000 as allowance of doubtful accounts

now bad debts will shown as $5000 in income statement as on 28 feb 2021 , and allowance of doubtful accounts will have $15000 as balance in balance sheet .

as this example proves why balances of bad debts expense virtually not equal to allowance of doubtful accounts

As allowance of doubtful debts accounts is created as per Gaap rules on estimation of uncollectible accounts receivables in past , and bad debts expense is actually amount company will not received on aging of credit period or debtors become defaulter.