Resources ❯ Accounting Terms

Valuation Allowance

[val-yoo-AY-shun uh-LOW-uhns]

What is the definition of Valuation Allowance?

A method used in accounting to adjust the carrying value of an asset or liability to its estimated recoverable amount or settlement amount through the use of a contra account.

Using Valuation Allowance in an Example

If a company anticipates that it will not be able to realize the full benefit of its deferred tax assets due to insufficient future taxable income, it must establish a valuation allowance. This allowance reduces the reported value of the deferred tax assets to the amount that is more likely than not to be realized.

Using Valuation Allowance in a sentence

During the quarterly review, the CFO explained that the increase in the valuation allowance was necessary due to the revised forecasts of taxable income.

Related Terms

VAT

A consumption tax levied on the value added to a product at each stage of its production and distribution, as well as at the time of purchase by the ultimate consumer.

Valuation

The process of determining the current value of an asset, whether it be a bond, stock, or any other financial asset, based on factors like market conditions, earnings, and asset values.

Value

The monetary worth or importance of something, typically determined by its utility, demand, and supply factors.

Value-Added Tax (VAT)

A consumption tax levied on the incremental value added to a product at each stage of its production or distribution cycle, culminating in the final purchase by the consumer.

Variable Annuity

A life insurance annuity contract whose value fluctuates based on the performance of an underlying securities portfolio or other index of performance.

Variable Costs

Total costs that change in direct proportion to changes in productive output or any other measure of volume.

Variable Manufacturing Costs

Costs that vary in direct proportion to the number of units produced, including expenses such as raw materials and labor that increase or decrease with the production volume.

Variable Overhead

The portion of overhead costs that varies directly with the level of production or activity within a business.

Variable Rate Loan

A loan whose interest rate changes over its life in relation to the level of an index, allowing for fluctuating payments.

Variance

A statistical measure of the dispersion of a set of data points around their mean value, calculated as the average of the squared deviations from the mean. The square root of the variance is known as the standard deviation.

Velocity

The rate at which money is spent or turns over in a specific period of time, affecting the amount of economic activity generated by a given money supply.

Vendor

A vendor is a supplier or seller of goods or services, often involved in wholesale distribution, manufacturing, or importation.

Venture Capital

Funds provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets.

Vertical Analysis

A financial analysis technique that expresses each item in a financial statement as a percentage of a base figure, allowing for the assessment of relative financial condition and performance within the statement.

Vesting

The process by which an employee accrues nonforfeitable rights over employer contributions made to the employee's retirement account or other benefit plans, based on years of service. Full vesting can occur over a specific period, commonly five years, or through a graded vesting schedule.

Voidable

A contract or transaction that can be legally declared invalid or annulled by one of the parties involved due to reasons such as fraud, coercion, misrepresentation, or incompetence.

Volatile

Characterized by or subject to rapid and extreme fluctuations, often used to describe financial markets or securities that experience high volatility.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, often quantified as the standard deviation or variance between returns from that same security or market index. Volatility can reflect the degree to which the price of the security or market fluctuates over a short period, indicating the level of risk associated with price changes.

Volume

The total number of shares or contracts traded for a particular security, commodity, or financial instrument within a specific period.

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