The allowance for doubtful accounts is a business’s estimate of the receivables it does not expect to collect, carried as a separate valuation account against the gross receivable so that the balance sheet shows the net amount expected to be collected. It is a contra-asset account, meaning it sits against an asset and reduces it rather than being a liability or a sum of cash set aside. Under current US accounting standards it is the allowance for credit losses, a valuation account that is deducted from the amortized cost basis of the financial asset to present the net amount expected to be collected (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1).
The same balance travels under several names. Allowance for doubtful debts, allowance for uncollectible accounts and allowance for bad debts all name this account, and the receivable it is deducted from is accounts receivable.
How the Allowance Is Measured
At the reporting date an entity records an allowance for credit losses on the financial assets in the standard’s scope, and reports in net income, as a credit loss expense, the amount necessary to adjust that allowance to management’s current estimate of expected credit losses (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1). Ordinary customer balances sit inside that scope, because the guidance reaches receivables that result from revenue transactions within the scope of Topic 606 on revenue from contracts with customers (FASB Accounting Standards Update 2016-13, paragraph 326-20-15-2).
Two features separate that estimate from the older model it replaced. Expected credit losses are estimated over the contractual term of the financial asset when the entity uses a method other than a discounted cash flow method (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-6), so the estimate reaches losses expected across the life of the balance rather than only losses already incurred.
It is also forward-looking. The estimate draws on information about past events, current conditions, and reasonable and supportable forecasts, and an entity may not rely solely on past events (FASB Accounting Standards Update 2016-13, paragraphs 326-20-30-7 and 326-20-30-9).
That forward-looking reach is narrowed by election for ordinary trade balances. For current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, an entity may elect a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the asset, and an entity other than a public business entity that elects it may also elect a further accounting policy on top of it (FASB Accounting Standards Update 2025-05, paragraphs 326-20-30-10A and 326-20-30-10C).
Whether a balance counts as current is tested over a one-year period unless the entity’s operating cycle exceeds 12 months, in which case the longer period is used (FASB Accounting Standards Update 2025-05, paragraph 326-20-30-10B). Both take effect for annual reporting periods beginning after December 15, 2025, and the interim reporting periods within those annual periods, with early adoption permitted (FASB Accounting Standards Update 2025-05, paragraph 326-10-65-6).
A clean collection history does not by itself retire the question. The estimate includes a measure of the expected risk of credit loss even if that risk is remote, whatever method is applied. The standard then carves out one case, and the adjustment is what does the work in it: an entity is not required to measure expected credit losses where historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts, results in an expectation that nonpayment of the amortized cost basis is zero (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-10).
The Methods the Standard Leaves Open
No single calculation is prescribed. An allowance may be determined using discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-3). The aging schedule is the familiar route in a smaller firm’s books, and which aging date the allowance is finally built from is worked through in how to read an accounts receivable aging report.
The Two Journal Entries
Two entries do the routine work of the account, and only one of them touches the income statement.
The first is the period-end adjustment. Debit bad debt expense, credit the allowance. That debit is the credit loss expense reported in net income, sized as the amount necessary to bring the allowance to management’s current estimate (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1).
The second is the write-off, made when a specific customer balance is judged uncollectible. Debit the allowance, credit accounts receivable. Writeoffs of financial assets, whether full or partial, are deducted from the allowance, and they are recorded in the period in which the balances are deemed uncollectible (FASB Accounting Standards Update 2016-13, paragraph 326-20-35-8). The write-off never touches expense, because the charge was already taken when the estimate was made.
Written out, they look like this.
At the reporting date, to bring the allowance to the estimate
DR Bad debt expense
CR Allowance for doubtful accounts
When a specific balance is judged uncollectible
DR Allowance for doubtful accounts
CR Accounts receivableA recovery sits outside those two entries. Recoveries of financial assets previously written off are recorded when received, and the standard does not settle the account they land in, noting that practices differ between entities as some industries typically credit recoveries directly to earnings while financial institutions typically credit the allowance (FASB Accounting Standards Update 2016-13, paragraphs 326-20-35-8 and 326-20-35-9). Either route reaches earnings, one directly and the other through the next review of the allowance.
A Worked Example
Say a client’s ledger carries the receivable lines below at the reporting date, one invoice is later judged uncollectible, and a fresh estimate is made at the next reporting date.
At the reporting date
Accounts receivable, gross 250,000
Allowance for doubtful accounts (9,000)
Accounts receivable, net 241,000
One invoice is judged uncollectible and written off
DR Allowance for doubtful accounts 2,400
CR Accounts receivable 2,400
Immediately after the write-off
Accounts receivable, gross 247,600
Allowance for doubtful accounts (6,600)
Accounts receivable, net 241,000
Next reporting date, the estimate is 10,000 and the allowance stands at 6,600
DR Bad debt expense 3,400
CR Allowance for doubtful accounts 3,400The write-off changes nothing a reader of the balance sheet can see. Gross receivables and the allowance fall by the same amount, the net does not move, and no expense is recorded. Expense appears again only at the next reporting date, and only for the amount needed to lift the allowance to the new estimate.
Where the Allowance Surfaces
On a balance sheet filed under Regulation S-X the amount is set forth separately in the balance sheet or in a note rather than folded into the receivable line (17 CFR 210.5-02), the presentation worked through in accounts receivable. The corporate return keeps the same two lines, with less allowance for bad debts sitting directly under trade notes and accounts receivable (IRS, Form 1120, Schedule L, lines 2a and 2b).
That is why the older term outlived the standard that renamed the account. Neither the regulation nor the return was rewritten to match, so one balance answers to allowance for credit losses in the accounting standard and to doubtful accounts or bad debts on the forms a firm actually files.
What the Allowance Is Not
It is not bad debt expense. Bad debt expense is the income statement charge for a period, while the allowance is the balance sheet estimate that charge creates, and the allowance stays on the books until a write-off or a later adjustment moves it. One is a flow through a period, the other a standing balance at a date.
It is not the direct write-off method. Under that method a receivable goes straight to expense when it goes bad and no estimate is carried at all, which is not what the standard asks for, since an allowance is recorded at the reporting date (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1). The book allowance is also not a deduction, since a deduction turns on a debt becoming worthless within the taxable year (26 U.S.C. 166), a timing difference of the kind set out in deferred tax assets.
It is not cash. Nothing is funded and nothing is set aside. The receivable stays on the books at its gross amount, and the allowance is an estimate written against it.
Common Questions
Its normal balance is a credit, which is what lets it reduce an asset that carries a debit balance. It is credited when the estimate is recorded and debited when a balance is written off, so a run of write-offs between reporting dates can leave it sitting temporarily on the debit side until the next adjustment brings it back to the current estimate (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1).
As account names they are interchangeable. Allowance for bad debts and allowance for doubtful accounts are the same balance on the books. The underlying words are not interchangeable. A bad debt is a specific balance already judged uncollectible and written off. Doubtful accounts are the balances still sitting in the ledger that the estimate expects to go that way.
Accountably places trained offshore accountants inside US CPA and EA firms, and a firm that wants to see the review standard on its own receivables work first can start with a trial task.
