Allowance for Bad Debts
Definition: A contra asset account that reduces accounts receivable to the amount expected to be collected. Also called Allowance for Doubtful Accounts. Estima…
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A contra asset account that reduces accounts receivable to the amount expected to be collected. Also called Allowance for Doubtful Accounts. Estimated using the aging method, percent-of-receivables, or percent-of-sales approach.
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Record estimated bad debts | ||
| Year-end: $3,120 estimated uncollectible. | ||
| Bad Debt Expense | $3,120 | |
| Allowance for Doubtful Accounts | $3,120 | |
| Contra-asset increases, reducing net A/R. | ||
| 2. Write off specific account | ||
| XYZ’s $1,500 deemed uncollectible. | ||
| Allowance for Doubtful Accounts | $1,500 | |
| Accounts Receivable | $1,500 | |
| Both allowance and A/R decrease; net receivables unchanged. | ||
| 3. Recovery — reinstate | ||
| XYZ unexpectedly pays; reverse write-off. | ||
| Accounts Receivable | $800 | |
| Allowance for Doubtful Accounts | $800 | |
| Restores A/R and allowance. | ||
| 4. Recovery — collect cash | ||
| Record $800 payment from XYZ. | ||
| Cash | $800 | |
| Accounts Receivable | $800 | |
| Cash collected, A/R cleared. | ||
Related Subjects
Related
- Allowance for Doubtful AccountsSame contra-asset account, alternative name
- Bad Debt ExpenseThe expense that increases the allowance
- Accounts ReceivableThe allowance reduces A/R to net realizable value
- Allowance MethodThe method that uses this account
Contrast
- Direct Write-Off MethodAlternative method that bypasses the allowance
Produces
- Net Realizable Value of ReceivablesA/R minus allowance = NRV
External Links
- Bad debt#Allowance method — Wikipedia