Question

Why don't you just show the net balance of accounts receivable? Why bother showing the deduction of the allowance account on the balance sheet?

Answer 1

When the amount is yet to be received from the customers for the services provided those account are called accounts receivables. These are the customers to which the services are provided but the payment will be received on a future date. Such transactions are called credit sales. There is high risk in credit sales as compared to cash sales as the amount may or may not be received. Thus, the company makes a contingency account known as allowance for doubtful accounts. It is a contra account which is deducted from the balance of accounts receivable. This presentation will provide a more realistic appearance to the financial statements. Such treatment is only for accounting purposes but is not strongly recommended for taxation purposes.