Homework Answers
Under the allowance method, allowance is made for doubtful accounts. Two bases are used to determine the amount of allowance (i) percentage of sales and (ii) percentage of receivables. Allowance is made in anticipation of doubtful accounts. Actual bad debt may not be the same as allowance made for doubtful accounts. Allowance for doubtful accounts is an anticipated loss while bad debt expense recorded in the income statement is the actual loss. Hence, most of the times these two balances are different from each other.
Allowance for doubtful accounts balance in the balance sheet represents total anticipated losses on account of failure of payment by customers. While bad debt represent the debt which has actually become bad. Actual bad debt expense may be greater or less than allowance for doubtful accounts.
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