Question

Allowance for Doubtful Accounts is an important function for businesses. For example, say a company lists 100 customers who purchase on credit and the total amount owed is $1,000,000. The $1,000,000 will be reported on the balance sheet as accounts receivable. The purpose of the allowance for doubtful accounts is to estimate how many customers out of the 100 will not pay the full amount they owe.

>True

>False

Answer 1

The above said statement is True.

Explanation:

Allowance for doubtful accounts is used to estimate the amount that company will/may not receive in future years therefore in Balance Sheet Allowance for doubtful accounts is reduced from Accounts Receivable.

So in the above example if there is 100 customer whom a company is serving on credit they are estimating that some of them will not pay in future (generally this estimation is made on the basis of past/indust experiance).

I hope this clear your doubt.

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