Why does the provision for doubtful debts account always have a credit balance?
Understand the Problem
The question is asking about the reason behind the credit balance in the provision for doubtful debts account, which relates to accounting practices and principles concerning bad debts.
Answer
It's a contra-asset account that offsets accounts receivable.
The provision for doubtful debts account always has a credit balance because it is a contra-asset account. Contra accounts have a natural credit balance and are used to offset related asset accounts, in this case, accounts receivable. This helps in reporting a more accurate net receivable figure on the balance sheet.
Answer for screen readers
The provision for doubtful debts account always has a credit balance because it is a contra-asset account. Contra accounts have a natural credit balance and are used to offset related asset accounts, in this case, accounts receivable. This helps in reporting a more accurate net receivable figure on the balance sheet.
More Information
The provision for doubtful debts account, also called the allowance for doubtful accounts, serves as a buffer for estimated uncollectible receivables, helping businesses anticipate potential losses.
Tips
A common mistake is to assume contra accounts have the same natural balance as regular accounts. In reality, they have the opposite balance.
Sources
- What is the provision for doubtful debts? - accountingtools.com
- Allowance for Doubtful Accounts: Methods of Accounting for - investopedia.com
- Guide to the Provision for Doubtful Debts | GoCardless - gocardless.com
AI-generated content may contain errors. Please verify critical information
