Allowance Method
Definition: Method of accounting for bad debts that estimates uncollectible accounts in advance and records them as an expense in the period the related revenu…
Scope:ModerateDifficulty:Moderate
Method of accounting for bad debts that estimates uncollectible accounts in advance and records them as an expense in the period the related revenue is recognized. Required under GAAP for conformity with the matching principle.
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Estimate bad debts | ||
| Year-end: $4,500 estimated uncollectible. | ||
| Bad Debt ExpenseExpense+ | $4,500 | |
| Allowance for Doubtful AccountsContra Asset+ | $4,500 | |
| Expense matched to the period of sale. | ||
| 2. Write off specific account | ||
| DEF’s $1,800 deemed uncollectible. | ||
| Allowance for Doubtful AccountsContra Asset− | $1,800 | |
| Accounts Receivable — DEFAsset− | $1,800 | |
| Net receivables unchanged. | ||
| 3a. Recovery — reinstate | ||
| DEF later pays; reverse write-off. | ||
| Accounts Receivable — DEFAsset+ | $1,800 | |
| Allowance for Doubtful AccountsContra Asset+ | $1,800 | |
| A/R and allowance both restored. | ||
| 3b. Recovery — collect | ||
| Record $1,800 from DEF. | ||
| CashAsset+ | $1,800 | |
| Accounts Receivable — DEFAsset− | $1,800 | |
| GAAP-preferred; matches expenses to revenue periods. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Bad Debt ExpenseBad Debt ExpenseExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$4,500.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$4,500.00
Allowance for Doubtful AccountsAllowance for Doubtful AccountsLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$1,800.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$4,500.00
$1,800.00
Normal bal. ▶
$4,500.00
Accounts Receivable — DEFAccounts Receivable — DEFAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$1,800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$1,800.00
$1,800.00
$1,800.00
CashAsset account. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$1,800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$1,800.00
Related Subjects
Components
- Allowance for Doubtful AccountsThe contra-asset account this method creates and maintains
Related
- Bad Debt ExpenseExpense estimated and matched to the period of sale
- Aging-of-Receivables MethodOne approach to compute the allowance estimate
- Percent-of-Sales MethodIncome-statement approach to estimating bad debts
- Percent-of-Receivables MethodBalance-sheet approach to estimating the allowance
Contrast
- Direct Write-Off MethodDirect method records expense at default; allowance estimates in advance
External Links
- Bad debt#Allowance method — Wikipedia