More than 60 years ago, accountants in the U.S. used Reserve for Bad Debts as the title of the contra account associated with Accounts Receivable or Loans Receivable. They also used Reserve for Depreciation as the title of the contra account associated with plant assets. The use of the word reserve led some readers of the financial statements to conclude that money was set aside for replacing plant assets or the uncollectible accounts or loans. To avoid this misunderstanding, the accounting profession recommended that the word reserve have a very limited use. Accountants now use Allowance for Doubtful Accounts or Allowance for Bad Debts instead of Reserve for Bad Debts. In the case of plant assets, Accumulated Depreciation is used in place of Reserve for Depreciation.
What is the difference between reserve and allowance?
Free Financial Statements Cheat Sheet
- What is a LIFO Reserve?
- What is the difference between reserve and provision?
- How can I determine the difference in earnings from using LIFO instead of FIFO?
- What is the difference between an adjunct account and a contra account?
- What to do with the balance in Allowance for Doubtful Accounts?
- What is the effect on the income statement when the allowance for uncollectible accounts is not established?
To learn more, see the Related Topics listed below:
Related TopicsBalance Sheet Depreciation Chart of Accounts Accounting Basics Bookkeeping Financial Accounting Accounts Receivable and Bad Debts Expense