How to Answer: What is an allowance for doubtful accounts and how is it reflected on the balance sheet?
Advice and answer examples written specifically for an Entry Level Accountant job interview.
12. What is an allowance for doubtful accounts and how is it reflected on the balance sheet?
How to Answer
This is a technical question that tests your understanding of accounting reserves, such as the Allowance for Doubtful Accounts. Accrual accounting methodology requires that certain reserves be made during a month, even if the cash impact occurs in a future month. For example, bad debt expense is recognized in the month of sale, even though it may be months until customer accounts are written off. The Allowance for Doubtful Accounts is a 'contra asset' that is netted against Accounts Receivable on the balance sheet.
Written by Brian Schuchart on March 1st, 2021
Answer Example
"The Allowance for Doubtful Accounts is a reserve account related to bad debt on customer sales. The bad debt is estimated each month in accordance with accrual accounting, and is usually a small percentage of total sales. The bad debt reserve sits in the Allowance for Doubtful Accounts account. It is considered a 'contra account' that nets against Accounts Receivable on the balance sheet."
Written by Brian Schuchart on March 1st, 2021