Contra-asset estimate that reduces gross receivables to the amount a business realistically expects to collect.
Allowance for doubtful accounts is the contra-asset balance used to reduce gross accounts receivable to net realizable value. It represents management’s estimate of the receivables that probably will not be collected.
Without an allowance, receivables and profit can be overstated. The allowance helps accounting reflect credit risk in the same period as the related sales activity instead of waiting until a customer account clearly fails.
At period end, accountants estimate expected credit losses using methods such as aging schedules, loss-history percentages, or other credit-risk analysis. The usual adjustment records bad debt expense and credits the allowance account.
When a specific customer balance is later written off, the write-off usually reduces both accounts receivable and the allowance. That means the write-off itself often does not create a new expense if the loss was already estimated earlier.
A company reviews its receivables aging and concludes that 4,500 will probably be uncollectible:
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | 4,500 | |
| Allowance for Doubtful Accounts | 4,500 |
Later, a 900 customer balance is written off:
| Account | Debit | Credit |
|---|---|---|
| Allowance for Doubtful Accounts | 900 | |
| Accounts Receivable | 900 |
The allowance is not a liability and it is not the same as a specific write-off. It is a valuation account attached to receivables, while a write-off removes an identified uncollectible balance.