Allowance for Doubtful Accounts

An allowance for doubtful accounts is an amount that a company estimates they will be unable to collect from their accounts receivables. The company will estimate this amount and put it on its balance sheet for accounting purposes. Most companies will plan ahead for this allowance and try to reserve a certain amount of money in cash in order to deal with these doubtful accounts. If the accounts do not pay, the company will take money out of savings in order to compensate for the loss. If companies are inaccurate with this estimate, it could negatively affect their financial situation.

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