Definition

Noun: A reserve fund created by a charge against profits in order to provide for changes in the value of a company's assets. It is a specific type of accounting entry used to anticipate and account for potential decreases in the value of assets, such as inventory or accounts receivable.

Usage

The term "allowance account" is used primarily in accounting and finance contexts. It refers to a contra-asset account that reduces the gross amount of an asset to reflect its estimated realizable value. It is established by recording an expense on the income statement.

Examples

• Noun:
  • The company's balance sheet shows an allowance account for doubtful accounts to cover potential customer defaults.
  • After the annual review, the accountant adjusted the allowance account for inventory obsolescence.
  • Creating an allowance account is a prudent way to recognize asset depreciation before an actual loss is confirmed.

Advanced Usage

• "To maintain an allowance account": To regularly review and adjust the balance of the reserve fund.
  • The firm must maintain its allowance account in accordance with the latest market valuations.

Variants and Related Words

• Allowance for Doubtful Accounts (n): A specific type of allowance account estimating the portion of accounts receivable that may not be collectible.
• Contra-Asset Account (n): The general category of accounts, which includes allowance accounts, that have a credit balance and are subtracted from a related asset account on the balance sheet.
• Valuation Allowance (n): An allowance account related to deferred tax assets.

Synonyms

• Reserve account
• Provision account (common in British accounting)

Related Phrases

• "To set up an allowance account": To establish this type of reserve fund.
  • The new CFO decided to set up an allowance account for the aging equipment.
• "To write off against the allowance account": To record an actual loss by reducing the balance of the allowance account.
  • When the customer declared bankruptcy, the bad debt was written off against the allowance account.

Noun

1. a reserve fund created by a charge against profits in order to provide for changes in the value of a company's assets