Allowance for Doubtful Accounts represents:
A) Cash set aside to make up for bad debt losses
B) The amount of uncollectible accounts written off to date
C) The difference between total sales made on credit and the amount collected from those credit sales
D) The difference between the gross amount of accounts receivable and the net realizable value of accounts receivable

Question

Quizplus · Accepted Answer

Allowance for Doubtful Accounts represents the estimated amount of accounts receivable that the company believes will not be collected. It is a contra-asset account that is deducted from the gross amount of accounts receivable to arrive at the net realizable value. Option A is incorrect because cash is not set aside specifically for bad debt losses, but rather the allowance is an estimate based on historical data and management's judgment. Option B is incorrect because the amount of uncollectible accounts written off to date would be reflected in the Bad Debt Expense account, not the Allowance for Doubtful Accounts. Option C is incorrect because it is a description of the Accounts Receivable account, not the Allowance for Doubtful Accounts.

Allowance for Doubtful Accounts Represents