Special Allowance Accounts

Definition

The term special allowance accounts refers to a contra asset to accounts receivable that ensures the amount appearing on the balance sheet is stated in terms of net realizable value.  Special allowance accounts are required to match anticipated and real expenses with the corresponding sales revenues.

Explanation

Allowance accounts are contra assets, and are used to ensure accounts receivable is shown on the balance sheet at net realizable value.   Generally, companies will have several types of allowance accounts, the most common of which include:

  • Sales Returns and Allowances:  used to describe the value of unsatisfactory merchandise returned by customers, or refunds issued by the company to customers.
  • Allowance for Doubtful Accounts:  also known as the allowance for bad debts, this represents the portion of accounts receivable the company does not expect to collect from customers that have made purchases on credit.
  • Collection Expense: if practical to assemble and material in value, includes handling and other charges associated with processes aimed at collecting accounts receivable from customers.

The above categories of costs are contra asset accounts, and their values are based on estimates provided by various subject matter experts in the company.  Actual expenses such as sales returns and bad debt expenses would appear on the company's income statement.  Companies need to go through the process of reconciling actual expenses to these allowance accounts so that accounts receivable is accurately depicted on the balance sheet.

Example

Company A's Q1 ending balance of accounts receivable was $3,867,000.  Company A has estimated the allowance for doubtful accounts to be $77,340, sales returns and allowance at $5,300, and collection expenses of $2,500.  Accounts receivable would appear on Company A's balance sheet as:

Accounts Receivable $3,867,000
Less:  Allowance for Doubtful Accounts -$77,340
Less: Sales Returns and Allowances -$5,300
Less:  Collection Expense -$2,500
Accounts Receivable, Net $3,781,860

Related Terms

balance sheet, accounts receivable, contra account, disposition of accounts receivable, allowance for doubtful accounts