What is an assessment grant?

A valuation allowance represents funds set aside for a specific purpose. Common reasons for this provision include a loss on investments, estimated amounts for bad accounts and depreciation of fixed assets. Typically, accountants post a valuation assignment to an offsetting account. An offsetting account falls under the group of asset accounts and resides on a company's balance sheet. The difference with a contra account is that it has a natural credit balance, which is the opposite of regular asset accounts.

Companies make a valuation estimate to adjust the historical value of an item as recorded in the company's general ledger. A counter account is related to an asset account and usually has an account number close to the original. In total, the original asset account with a debit balance will be offset against the counter account with a credit balance. The difference represents the actual value of the item on a current estimate of fair value. Each asset item has its own counter account for this process.

Accounts receivable is a common example of a valuation estimate. A business sells goods or services on credit, which allows customers to pay bills over time. Many companies allow customers 30 days to pay the balance of their outstanding receivables. Accountants estimate how many outstanding receivables will remain uncollected from customers who do not pay their bills. Accountants make an allocation using one of two methods to create this number.

Sales percentage or accounts receivable percentage are two common valuation allocation methods used for accounts receivable. The first method requires accountants to review past credit sales to determine how many of them have been written off. The accounts receivable percentage method is similar; Accountants review past canceled receivables and create a percentage to apply to current receivables. The default percentage, applied to outstanding receivables, indicates the valuation allowance for default. Accountants post this amount to an allowance for doubtful accounts, which is an offsetting asset that connects with current accounts receivable.

Valuation methods for other items, mainly assets, work in a very similar way. Accountants must find the current value of items through estimates or by looking at the current market price of items. In most cases, items lose value and need adjustment, so a company represents its true financial value. National accounting standards often call this method market accounting or fair value accounting. Accountants must stay within these guidelines to ensure they make the proper valuation assignment to assets.