Before we get into the methods and how we do the allowance method, I want to introduce
you to this new account were on to talk about, which is called the Allowance for Doubtful
account. And it's a new type of account. We've talked about our assets, our liabilities,
our equity, our revenues and our expenses. But this is a new type of account. And so
it's really important that you understand how this works, because it'll make a little
bit more sense as we go through these problems. So they allow us for help account. It's what's
called a Contra account, and a contrary account is really but Let's go through this. Let's
say, hypothetically, we have AR, and AR is represented by our folder, and in that we're
going to add, you know, sometimes people can buy something for 1,000, I'm going to add
that, and then 2,000 and then 500 and then 4,000, whatever. They're going to add all
these to our accounts receivables. And when they do that, some of them are going to actually
start paying some of these off as well. So they may have 500. They're gonna pay off of
the thousand, and they're going to have the 2,000 on off in its entirety. They're going
to have all this. And then once I add all this up, this is going to give me 5,000 as
my AR balance. Okay. So this is pretty much what we know as our art table. Right now,
I'm still owed 5,000 dollars. Now, if I go to my balance sheet with this information,
I would put it under assets and start with cash. We know something. And then we would
have a our accounts received. We put 5,000. But that's not exactly right, because what
that's showing is this is what I'm owed and going to receive that's not right. I know
I'm not going to receive all that because based on historical evidence, I know I'm not
going to receive every any of this. So it's really not right for me to show my investors
this is what I think I'm going to get. This is what I have the opportunity to get. But
I think I really know I'm not going to receive every Penny of it. So I've got to figure out
a way to give more information to my investors, but still be able to keep this 5,000. And
that's where the Allowance for Doubt Full Accounts comes into play. So what does the
allows for the account? It is a type of like I said, it is a type of Contra accounts. When
you think of contrary, you think of contrary opposite of. And that's exactly what this
is. It is an account that is an asset account, but it works in contradiction to some other
parent account. So we know assets on a tip would be plus minus. A contrast set account
is minus plus. The debit is minus in the credit of a plus. A contrast set account also works
together with what we call a parent account, it is connected to a parent account. So when
you have AR, you're also going to have allowance for dental account or what do we call ADA.
Okay. And it is going to offset the value of the AR. So the contrary account is a general
ledger account that produces the value of a related or parent account when the two are
netted together. And the contract account works in contrast with the parent account.
So let me show you how this works using the example with the envelope. So now we have
our envelope again, 5,000 dollars, and that's if we keep it there, we're saying that this
is what I'm owed and what I think I'm going to receive, and we know it's not what we think
we're going to receive. So what we need to do is we need to take a bit of that 5,000
dollars, but we think we're not going to receive from that. And we're going to put it into
another envelope, and that envelope is in our AR envelope. So it's kind of like an envelope
within the envelope. And so Let's just say I'm going to take a bit of this. I'm gonna
take 200 dollars out of that, and I'm going to put in a and what I'm saying is, okay,
I have the potential to get 5,000. That doesn't change, but I think I'm not going to get the
200 dollars. So therefore, what I really think I'm going to get in cash is 4,800. And hopefully
you can start to see how that's more informative to investors. Ideally, they're going to get
5,000, but we know that's not going to be right. They think they're really not going
to get 200. So really, they really, truly think they're only going to get about 4 800.
And that's how you would read into that. So looking at it from again, even by doing this,
my AR balance is still 5 0. If I was looking at this from the balance sheet, it would look
like this, again, I would have my cash, whatever. That's my starting point. Then I'd have the
count receivable F 5,000. This is what I have the potential to get. This is what I owe,
what I could get in total. But I'm also going to have my allowance for Alpha account, and
that's going to be a negative number because it offsets. And this is what I think I'm not
going to receive. I'm not going to get. And if I take the difference between those two,
that's going to give you my net realizable value, the total cash value, if I take a difference
of it's going to give me 4,800 dollars. So again, this is what I really think I'm going
to get or receive. So like I said, this is just a more informative way to keep up with
stuff. And then that allowance for out accounts, I'm able to expand and take it off of my revenue,
Soi don't have my net income, so I don't have to pay the tax on what I think I'm not going
to get. So that's the premise of allowance for doubt full accounts as we go through this,
and you're going to see some examples and stuff like that in the next videos of this
actually working in process. So hopefully this will make a little more sense to you
as well. I appreciate.