What is the purpose of the allowance for credit losses (ACD) and how is it presented?

• A. It estimates expected credit losses on receivables and is presented as a contra-asset reducing accounts receivable.
• B. It is a liability.
• C. It is recorded as revenue.
• D. It is an asset.

Answer: (A)

The allowance for credit losses is used to estimate the portion of receivables that may not be collected. This estimate reflects expected losses and is recorded as a contra-asset, reducing the accounts receivable balance on the balance sheet to show the net realizable value of the receivables. It is not a liability or revenue, nor is it an asset in itself—the contra-asset nature means it offsets, rather than adds to, the AR balance. For example, if receivables are 100 and the allowance is 6, net receivables shown are 94. As actual write-offs occur, the allowance is used up and the net amount decreases accordingly; recoveries would increase cash and reduce the allowance.