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…
Scope:ModerateDifficulty:Moderate
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 ExpenseExpense+ | $3,120 | |
| Allowance for Doubtful AccountsContra Asset+ | $3,120 | |
| Contra-asset increases, reducing net A/R. | ||
| 2. Write off specific account | ||
| XYZ’s $1,500 deemed uncollectible. | ||
| Allowance for Doubtful AccountsContra Asset− | $1,500 | |
| Accounts ReceivableAsset− | $1,500 | |
| Both allowance and A/R decrease; net receivables unchanged. | ||
| 3. Recovery — reinstate | ||
| XYZ unexpectedly pays; reverse write-off. | ||
| Accounts ReceivableAsset+ | $800 | |
| Allowance for Doubtful AccountsContra Asset+ | $800 | |
| Restores A/R and allowance. | ||
| 4. Recovery — collect cash | ||
| Record $800 payment from XYZ. | ||
| CashAsset+ | $800 | |
| Accounts ReceivableAsset− | $800 | |
| Cash collected, A/R cleared. | ||
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.
$3,120.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$3,120.00
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.
$1,500.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$3,120.00
$800.00
Normal bal. ▶
$2,420.00
Accounts ReceivableAsset account — amounts owed by customers. 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.
$800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$1,500.00
$800.00
$1,500.00
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.
$800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$800.00
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