What is the relationship between accounts receivable and allowance for doubtful accounts?

What is the relationship between accounts receivable and allowance for doubtful accounts?

• A. Accounts Receivable is an asset; Allowance for Doubtful Accounts is a contra-asset reducing AR to reflect expected uncollectible amounts.
• B. Accounts Receivable is a liability; Allowance is an asset.
• C. Both are assets with no offset.
• D. Allowance increases AR.

Answer: (A)

Accounts receivable is an asset representing money customers owe you. The allowance for doubtful accounts is a contra-asset that reduces that asset to reflect the portion you don’t expect to collect. So the net amount you expect to realize is AR minus the allowance, often called net realizable value. On the balance sheet you show AR net of the allowance. You establish the allowance by recognizing a bad debt expense and crediting the allowance account, for example by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts. When a specific receivable is actually written off, you decrease both accounts: debit the allowance and credit accounts receivable. This reduces AR to the net amount you expect to collect, and it hasn’t caused a new expense at write-off time because the expense was recorded when you set up the allowance. This isn’t a liability, and the allowance doesn’t increase AR; it reduces AR to reflect estimated uncollectible amounts.

Accounts receivable is an asset representing money customers owe you. The allowance for doubtful accounts is a contra-asset that reduces that asset to reflect the portion you don’t expect to collect. So the net amount you expect to realize is AR minus the allowance, often called net realizable value. On the balance sheet you show AR net of the allowance.

You establish the allowance by recognizing a bad debt expense and crediting the allowance account, for example by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts. When a specific receivable is actually written off, you decrease both accounts: debit the allowance and credit accounts receivable. This reduces AR to the net amount you expect to collect, and it hasn’t caused a new expense at write-off time because the expense was recorded when you set up the allowance.

This isn’t a liability, and the allowance doesn’t increase AR; it reduces AR to reflect estimated uncollectible amounts.