Definition
Allowance refers to various types of financial concessions or amounts provided under different circumstances:
- Deducted from an invoice: For instance, to compensate for damaged goods.
- Given to an employee for expenses: Such as travel costs.
- A tax allowance: A permitted deduction or relief for tax purposes.
Examples
- Invoice Deduction: A supplier might offer a $100 allowance on an invoice if the goods delivered were damaged.
- Employee Expenses: An employee traveling for a business meeting might receive a daily allowance to cover meals, lodging, and transportation.
- Tax Allowance: A taxpayer might receive a tax allowance for investment in energy-efficient home improvements, lowering their taxable income.
Frequently Asked Questions
What is an allowance in accounting?
An allowance in accounting can refer to a deduction from revenues or expenses that compensates for variations like damaged goods or supplies overhead costs like employee travel expenses.
How does an allowance affect an invoice?
An allowance can reduce the amount due on an invoice. For example, if goods are damaged upon delivery, the buyer can deduct the damage cost from the total invoice amount.
What types of allowances can employees receive?
Employees can receive allowances for various expenses, including travel, meals, lodging, and other costs incurred in carrying out their professional duties.
How are tax allowances applied?
Tax allowances reduce taxable income, lowering the amount of tax owed. Examples include personal allowances, business allowances, and specific allowances like capital or energy-efficient improvement allowances.
Related Terms
- Capital Allowances: Deductions companies can claim for wear and tear of capital assets (e.g., machinery, buildings).
- Income Tax Allowances: Legal exemptions that lower taxable income, such as personal allowances and exemptions for charitable donations.
Online References
Suggested Books for Further Studies
-
“Intermediate Accounting” by Donald E. Kieso
- An in-depth resource that covers financial accounting principles, including allowances.
-
“Financial Accounting: An Introduction” by David Harvey
- A beginner-friendly guide to understanding financial accounting concepts, allowances included.
-
“Accounting Principles” by Jerry J. Weygandt
- This book provides a complete overview of accounting techniques, incorporating practical examples of different types of allowances.
Accounting Basics: “Allowance” Fundamentals Quiz
### What is a common reason for deducting an allowance from an invoice?
- [x] Compensation for damaged goods
- [ ] Early payment benefits
- [ ] High-cost deductions
- [ ] Premium delivery charges
> **Explanation:** Allowances might be deducted to compensate for damaged goods, reducing the invoice amount accordingly.
### What type of allowance might an employee receive for travel expenses?
- [x] Per diem allowance
- [ ] Overtime allowance
- [ ] Housing allowance
- [ ] Performance allowance
> **Explanation:** Employees traveling for work might receive a per diem allowance to cover daily expenses like meals and transportation.
### Can an allowance reduce taxable income for individuals?
- [x] Yes, tax allowances reduce taxable income.
- [ ] No, allowances cannot influence taxable income.
- [ ] Only for pensioners
- [ ] Only for students
> **Explanation:** Tax allowances, like personal allowances, are deductions that reduce an individual's taxable income.
### What term is used for deductions related to wear and tear of assets?
- [ ] Depreciation
- [x] Capital allowances
- [ ] Deferred revenue
- [ ] Principal repayment
> **Explanation:** Capital allowances are deductions related to the wear and tear of capital assets such as machinery and buildings.
### How does an allowance for travel affect employee expenses?
- [ ] Increases their taxable income
- [ ] Does not impact expense claims
- [x] Provides reimbursement for travel-related costs
- [ ] Decreases base salary
> **Explanation:** Travel allowances reimburse employees for expenses incurred while on business trips, such as meals and lodging.
### When is an invoice allowance generally applied?
- [x] When goods are damaged or defective
- [ ] For early payments
- [ ] To account for inflation
- [ ] During high-demand periods
> **Explanation:** Allowances on invoices are commonly applied to adjust for goods that are damaged or defective upon arrival.
### Are personal allowances the same as company allowances?
- [ ] Yes, they are identical.
- [x] No, personal allowances and company allowances are different.
- [ ] Only in certain jurisdictions
- [ ] Only for non-profit organizations
> **Explanation:** Personal allowances primarily reduce individual tax liabilities, whereas company allowances are typically related to business expenses.
### Which of these is a type of tax allowance?
- [ ] Depreciation
- [ ] Insurance expense
- [x] Personal allowance
- [ ] Sales tax
> **Explanation:** Personal allowances are a type of tax allowance that reduce the taxable amount for individuals based on personal circumstances.
### What kind of allowance could a business claim for machinery wear and tear?
- [x] Capital allowance
- [ ] Revenue stream
- [ ] Purchase allowance
- [ ] Expense allocation
> **Explanation:** Capital allowances are tax deductions for the depreciation of machinery and other capital assets.
### Does the IRS provide guidance on allowances?
- [x] Yes, through various publications and topics.
- [ ] No, the IRS does not handle allowances.
- [ ] Only state tax agencies do
- [ ] Occasionally in footnotes
> **Explanation:** The IRS provides extensive guidance on various types of allowances, including tax allowances, through publications and topics.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
