Define Valuation allowance
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At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Define Valuation allowance
Valuation allowances are reserves created, which can set off deferred tax assets. If it is probable that a company will not be in a position to take benefit of deferred tax assets (DTA) in the future, a valuation allowance is created. Such a situation can arise when a company believes that it would be incapable to make enough profits to utilise deferred tax assets.
If at any given point of time in the future it is determined deferred tax asset can be utilised, the entry previously passed for transferring it to valuation allowance can be reversed.
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