Final answer:
C&N Ltd's balance sheet reflects $2,350,000 in accounts receivable, offset by an allowance for doubtful accounts of $70,000, indicating the company's anticipation of uncollectible receivables and ensuring the presentation of a realistic financial position.
Step-by-step explanation:
Understanding Accounts Receivable and Allowance for Doubtful Accounts
C&N Ltd, a company that manufactures goods and sells them on 30-day credit terms, reported annual sales of approximately $25 million at the end of 2016. In their balance sheet, they listed their accounts receivable at $2,350,000 with a deduction of an allowance for doubtful accounts at $70,000. This allowance represents the estimation of accounts receivable that might not be collectible. Businesses often use an allowance for doubtful accounts to anticipate potential losses from customers who cannot pay their debt, ensuring a more accurate representation of the company's financial health.
The use of an allowance for doubtful accounts affects a business's balance sheet by reducing the gross accounts receivable to its net realizable value. This accounting practice aligns with the conservative principle, providing a clearer picture of the probable actual cash inflow from receivables. This financial information is crucial for lenders, investors, and other stakeholders who are interested in the liquidity and credit risk associated with the company's receivables.