Allowance For Doubtful Accounts

See: Aging Receivables, and think: Oi, my aching…receivables.

Well, wine is about the only thing that gets better with age. And even it has limits. When receivables (a balance sheet item) get old, they too, uh…get bad. Note how much higher the probability of non-collection (called DeadBeatism) gets...as the age of the receivables increases.

Generally speaking, bills that are gonna get paid, get paid fast, or on time. And those that don’t…have to be tracked. Best guesses matter in accounting, so coming to an actual, predicted, rational and reasonable number…is a big deal.

And you can see that, in this case, the spread between the legally owed money and the amount likely to be collected is a pretty big one. The decline hits the assets side of the balance sheet in the form of accounts receivable being lower, and eventually, when a bad debt is finally recognized as a deadbeat, which is…dead...it simply gets written off on the income statement. It goes away and is a sale that…never happened.

So that’s Aging Receivables in a nutshell. And yeah, this is the one time you don’t need to respect the elderly.