The allowance for doubtful accounts is a contra-asset estimate that reduces gross receivables to the amount a business expects to collect.
Estimate the allowance using a documented method such as aging percentages, historical loss rates and specific customer evidence, then update it each reporting period.
Allowance for doubtful accounts example
| Aging bucket | Receivable | Estimated loss rate | Allowance |
|---|---|---|---|
| Current | $100,000 | 1% | $1,000 |
| 1-30 days overdue | $30,000 | 3% | $900 |
| 31-90 days overdue | $15,000 | 15% | $2,250 |
| Over 90 days | $5,000 | 50% | $2,500 |
| Total | $150,000 | $6,650 |
The allowance is a contra asset that reduces gross accounts receivable on the balance sheet. The period adjustment generally affects bad debt expense, subject to the applicable accounting framework. It is not the same as writing off named unpaid invoices.
Use historical credit-loss data, current collection evidence, customer-specific risk, and reasonable forward-looking information. Management should document changes in estimates so the financial statements are not manipulated by an unexplained percentage.
Document why the loss estimate changed
Use aging, customer-specific information and the applicable accounting framework to support the estimate. A percentage copied from last year may no longer reflect the current customer mix. Keep the calculation and approval so the next period can compare actual outcomes with the estimate. An allowance is an estimate of losses, while a write-off removes a specific balance under the approved policy.
Example
An aging model estimates $8,000 uncollectible; the business records bad debt expense and credits the allowance so net receivables reflect expected collection.
What to watch for
The allowance is an estimate, not a list of invoices already written off, and management bias can materially distort profit and assets.
Put the next step into practice
Read our guide to credits, refunds and debit notes for the related workflow. Explore Invoice Crowd customer invoicing to see the product capabilities relevant to your setup.
