Final answer:
Oracle and other banks account for possible loan defaults by setting aside an allowance for doubtful accounts in their financial planning. This allowance for doubtful accounts appears on the balance sheet as a contra-asset to reflect the risk associated with outstanding loans. Unexpected increases in loan defaults negatively affect the bank's net worth and financial health.
Step-by-step explanation:
The question concerns how Oracle handles the allowance for doubtful accounts, which is a concept related to accounting in the banking sector. A well-run bank such as Oracle will anticipate that some borrowers may not repay their loans, known as loan defaults, and will account for this possibility by including an allowance for doubtful accounts in its financial planning. This allowance is a contra-asset account on the balance sheet that reduces the total amount of outstanding receivables that the bank expects to collect, reflecting the risk that some loans will not be repaid.
For instance, if a bank like Oracle has issued $5 million in loans and anticipates a default rate of 2%, it would set aside $100,000 as an allowance for doubtful accounts. This accounting practice ensures that the bank's financial statements present a more accurate picture of its expected cash flows and overall financial health. If the bank experiences an unexpectedly high level of defaults, like during a recession, and the loan value declines significantly (say from $5 million to $3 million), the bank's assets and net worth will be negatively impacted.