Allowance is a term used frequently in finance, from family finances to government and taxes. Though the term generally means a specific amount of money granted or given to a person or some other entity, the purpose for allowances differs in each situation. Here are the most common types of allowances:
Family. In a family setting, allowances are given by the parents to their children either as a reward for good behavior and performance of chores or as a regular gift, depending on the parenting style.
At your job. At work allowances are given by some employers as part of the employees’ benefits package with each allowance given for a specific purpose, such as travel allowances and meal allowances.
Business. When it comes to businesses the term allowance takes on a whole new meaning. This time when the term allowance is mentioned, it doesn’t mean money granted to a person or entity, but money SET ASIDE for a specific purpose that may or may not come to pass.
For example, allowance for depreciation, is an expense accumulates over time as the value of an asset goes down as time passes. Allowances must be set to accommodate for the depreciation of assets so that it will write of the cost of the asset by the time that specific asset is rendered unusable. Another example would be allowance for bad debts. Lenders need to always set aside enough capital as an allowance for bad debts or they’ll end up in trouble as soon as several debtors default on their loans.
