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.
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:
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.
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:
|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|