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…
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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 Expense | $4,500 | |
| Allowance for Doubtful Accounts | $4,500 | |
| Expense matched to the period of sale. | ||
| 2. Write off specific account | ||
| DEF’s $1,800 deemed uncollectible. | ||
| Allowance for Doubtful Accounts | $1,800 | |
| Accounts Receivable — DEF | $1,800 | |
| Net receivables unchanged. | ||
| 3a. Recovery — reinstate | ||
| DEF later pays; reverse write-off. | ||
| Accounts Receivable — DEF | $1,800 | |
| Allowance for Doubtful Accounts | $1,800 | |
| A/R and allowance both restored. | ||
| 3b. Recovery — collect | ||
| Record $1,800 from DEF. | ||
| Cash | $1,800 | |
| Accounts Receivable — DEF | $1,800 | |
| GAAP-preferred; matches expenses to revenue periods. | ||
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