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Open it The estimated uncollectible amount is recorded in an account called allowance for bad debts . Because the effect of the allowance for bad debts account is to reduce the balance of the company’s accounts receivable, it is known as a “contra asset account.”<
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3.1. Financial Statement Elements and Accounts ncial statements. The actual accounts used in a company’s accounting system will be set forth in a chart of accounts . Generally, the chart of accounts is far more detailed than the information presented in financial statements.
<span>Certain accounts are used to offset other accounts. For example, a common asset account is accounts receivable, also known as “trade accounts receivable” or “trade receivables.” A company uses this account to record the amounts it is owed by its customers. In other words, sales made on credit are reflected in accounts receivable. In connection with its receivables, a company often expects some amount of uncollectible accounts and, therefore, records an estimate of the amount that may not be collected. The estimated uncollectible amount is recorded in an account called allowance for bad debts . Because the effect of the allowance for bad debts account is to reduce the balance of the company’s accounts receivable, it is known as a “contra asset account.” Any account that is offset or deducted from another account is called a “ contra account .” Common contra accounts include allowance for bad debts (an offset to accounts receivable for
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