Valuation reserve definition
/What is a Valuation Reserve?
A valuation reserve is an allowance that is paired with and offsets an asset. The reserve is designed to absorb any declines in the value of the associated asset. A reserve is created by making a charge to earnings in the amount of any expected losses, thereby accelerating expense recognition into the current reporting period. Valuation reserves are a key element of accrual basis accounting.
Examples of Valuation Reserves
Here are several examples of valuation reserves:
Allowance for doubtful accounts. The allowance for doubtful accounts contains management’s best estimate of the amount of bad debts that will eventually arise from the current trade accounts receivable.
Allowance for obsolete inventory. The allowance for obsolete inventory contains management’s best estimate of the cost of those inventory items that will eventually prove to be obsolete. This obsolescence figure may be based on historical data, as well as an analysis of the age of the various items currently in stock.
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FAQs
How Does a Valuation Reserve Differ From an Impairment?
A valuation reserve is a contra-asset account that reduces an asset’s carrying amount based on recurring estimates of potential loss, such as doubtful accounts or inventory obsolescence. An impairment, by contrast, is a direct, often one-time write-down of an asset to its fair value due to a specific triggering event, such as market decline or damage. While valuation reserves are adjustable over time, impairments generally remain unless the asset is later disposed of or sold.