Accounting word of the week
As a business owner, more than likely, at some point in time, you will have to write-off bad debts on your balance sheet. Most balance sheets will show a classification known as an allowance for bad debts. Allowance for bad debts is a provision that shows the possibility of a receivable being uncollected. When you view it on a balance sheet, you will see your accounts receivable classified as gross receivable, reduced by allowance for bad debts, which will then represent your receivable, as net receivables.
Let's look at an example:
As a business owner, you have a gross receivable at $1,000,000 and the allowance for bad debts account is set at $500,000, your current asset on the balance sheet will show:
Accounts receivable: $1,000,000
Less: Allowance for bad debts: $ 50,000
Accounts receivable - Net: $ 950,000