The allowance for doubtful accounts is an example of a “contra account,” one that always appears with another
account but as a direct reduction to lower the reported value. Here, the allowance serves to decrease the receivable
balance to its estimated net realizable value. As a contra asset account, debit and credit rules are applied that are
the opposite of the normal asset rules. Thus, the allowance increases with a credit (creating a decrease in the net
receivable balance) and decreases with a debit. The more accounts receivable a company expects to be bad, the
larger the allowance. This increase, in turn, reduces the net realizable value shown on the balance sheet.
By establishing two T-accounts, a company such as Dell can manage a total of $4.843 billion in accounts
receivables while setting up a separate allowance balance of $112 million. As a result, the reported figure—as
required by U.S. GAAP—is the estimated net realizable value of $4.731 billion.
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