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How Does the Use of Collateral and Net Worth Help

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How does the use of collateral and net worth help reduce the problem of adverse selection?


Definitions:

Allowance for Doubtful Accounts

A contra-asset account that reduces the total receivables amount to reflect what is expected to be collectible.

Bad Debts Expense

An expense account reflecting the cost of accounts receivable that a company does not expect to collect.

Uncollectible Accounts

Refers to receivables that are deemed unlikely to be collected, indicating potential losses for a company.

Allowance for Doubtful Accounts

An accounting provision made by a company to account for accounts receivable that might not be collected.

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