The allowance for doubtful accounts is a contra-asset account that estimates how much of your accounts receivable you will never collect. You create it with an adjusting entry that debits Bad Debt Expense and credits the allowance. When a specific customer's balance later goes bad, the write-off debits the allowance — not expense — and credits Accounts Receivable.
If you have already met Accumulated Depreciation in the depreciation journal entry, you know this pattern: a credit-balance account paired with an asset, so the asset's original figure stays visible while the balance sheet reports a more honest number. Here the honest number is net realizable value — gross receivables minus the allowance — the amount of cash the company actually expects to collect.
Start with the estimate. Harwood Supply Co. ends its first year with $184,600 of accounts receivable. Companies in its industry typically fail to collect about 3% of receivables, so Harwood estimates $184,600 × 3% = $5,538 will go uncollected. Because this is the first year on account, the allowance starts at zero, and the full $5,538 goes in with a year-end adjusting entry.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Bad Debt Expense | $5,538 | |
| Allowance for Doubtful Accounts | $5,538 |
The allowance method exists because of the matching principle. The credit sales that will eventually go bad happened this year, so the expense of not collecting them belongs in this year's income statement — even though Harwood cannot yet name which customers will default. The estimate lets the expense land in the same period as the revenue it relates to, and it lets the balance sheet show receivables at the amount the company realistically expects to collect rather than the amount it invoiced.
The alternative is the direct write-off method: record nothing until a specific account proves uncollectible, then debit Bad Debt Expense and credit Accounts Receivable. It is simpler, but it books the expense one or two periods after the sale, overstates receivables in the meantime, and for those reasons fails GAAP whenever bad debts are material. Textbooks show it mostly as a contrast; exams expect the allowance method.
The allowance then waits until a name attaches to the estimate. In March, Harwood learns that Marlowe Cabinetry has filed for bankruptcy and its $2,140 balance will never arrive. The write-off touches only balance-sheet accounts.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 14 | Allowance for Doubtful Accounts | $2,140 | |
| Accounts Receivable — Marlowe Cabinetry | $2,140 |
| Balance sheet line | Before write-off | After write-off |
|---|---|---|
| Accounts receivable (gross) | $184,600 | $182,460 |
| Less: allowance for doubtful accounts | ($5,538) | ($3,398) |
| Net realizable value | $179,062 | $179,062 |
A written-off customer pays after all. Suppose Marlowe emerges from bankruptcy in June and sends the $2,140. Recovery takes two entries: first reinstate the receivable by reversing the write-off, then record an ordinary cash collection. No revenue or income is recorded — the recovery simply puts the allowance back.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jun 9 | Accounts Receivable — Marlowe Cabinetry | $2,140 | |
| Allowance for Doubtful Accounts | $2,140 | ||
| Jun 9 | Cash | $2,140 | |
| Accounts Receivable — Marlowe Cabinetry | $2,140 |
Estimating with an aging schedule. Instead of one flat percentage, an aging schedule sorts receivables by how overdue they are and applies a steeper rate to older buckets, because a receivable that is 90 days late is far less likely to arrive than one billed last week. Suppose Harwood's $184,600 breaks down as $121,400 current (1% uncollectible = $1,214), $38,700 at 1–30 days past due (5% = $1,935), $16,100 at 31–60 days (12% = $1,932), and $8,400 more than 60 days past due (40% = $3,360). The target allowance is the sum: $8,441.
The allowance already has a balance. Here is the twist that costs the most exam points. Percentage-of-receivables and aging both produce a target ending balance for the allowance, not the amount of the entry. If the aging says the allowance should end at $8,441 and the account already carries a $1,220 credit balance, the adjusting entry is $8,441 − $1,220 = $7,221 — you adjust the allowance to the target, not by it. If heavy write-offs have pushed the allowance to a temporary $460 debit balance, you add instead: $8,441 + $460 = $8,901. The one method that skips this step is percentage of credit sales, which computes Bad Debt Expense directly, so the estimate is the entry amount regardless of what sits in the allowance.
The estimate debits Bad Debt Expense and credits the allowance; the write-off debits the allowance and credits Accounts Receivable. The expense is recognized once, at the estimate — never again at write-off — which is why net realizable value does not move when a specific account goes bad.
It is a contra-asset: it sits in the current assets section of the balance sheet, directly under Accounts Receivable, but it carries a credit balance and is subtracted from gross receivables to report net realizable value. It is not an asset in its own right, and it is not a liability.
Its normal balance is a credit, opposite the debit balance of the asset it offsets. It can show a temporary debit balance mid-year if write-offs run ahead of the estimate; the next adjusting entry restores the credit balance.
Three common methods: a flat percentage of ending receivables, an aging schedule that applies higher percentages to older receivables, or a percentage of credit sales. The first two produce a target ending balance, so the entry is the difference between the target and the allowance's existing balance. Percentage of credit sales computes Bad Debt Expense directly, so the estimate is the entry amount.
No. The write-off debits the allowance and credits Accounts Receivable — both balance-sheet accounts. The income effect happened earlier, in the period when Bad Debt Expense was recorded with the estimate.
Bad Debt Expense is the income-statement account that reduces profit in the period of the estimate, and it closes to zero each year. The allowance is the balance-sheet contra-asset that carries forward, absorbing write-offs until the next estimate tops it up.
It appears within current assets, but as a deduction: gross Accounts Receivable minus the allowance equals net realizable value, and that net figure is the current asset amount the balance sheet reports.
By the FinanceBrain Team · Last verified July 11, 2026 · How we produce and verify articles