Under current US GAAP (ASC 326) the account is called the allowance for credit losses, and IFRS 9 calls it the loss allowance. It carries a credit balance and sits directly under accounts receivable, so the balance sheet shows receivables at the net amount you expect to collect.
How the allowance works on the balance sheet
Gross receivables stay at the full invoiced amount until an invoice is paid or written off. The allowance holds your estimate of the part you will not collect, and net receivables equal gross receivables minus the allowance.
ASC 326 describes the allowance as a valuation account deducted from the receivable to show the net amount expected to be collected, and requires it to be presented separately on the balance sheet (FASB ASU 2016-13). That is why US balance sheets often read accounts receivable, net of allowance, with the allowance shown in parentheses. UK accounts usually show trade debtors after deducting the provision.
How to estimate the allowance for doubtful accounts
- Aging method. Apply a higher loss rate to each older bucket of the aging report, an approach IFRS 9 calls a provision matrix. The aging report entry has a worked calculation.
- Percentage of receivables. Apply one historical loss rate to the whole balance. It is quick but ignores how old each invoice is.
- Individual assessment. Take customers in bankruptcy, administration or serious dispute out of the pool and estimate each loss separately. ASC 326 requires this for assets that do not share risk characteristics with the rest.
- Current conditions and forecasts. Adjust loss history where today's conditions or a reasonable forecast differ from the past. Under IFRS 9, trade receivables without a significant financing component always carry lifetime expected credit losses.
For US GAAP reporters, ASU 2025-05 adds a practical expedient for current receivables from contracts with customers, for annual periods beginning after December 15, 2025. Any company may assume that conditions at the balance sheet date stay the same for the rest of the receivables' life, and companies that are not public business entities may also take account of cash collected after the balance sheet date.
Example. A wholesaler has $480,000 of trade receivables on December 31. One customer owing $18,000 has filed for bankruptcy, and the wholesaler expects to recover about 25% of it, so it sets an individual allowance of $18,000 × 75% = $13,500. For the other $462,000, its provision matrix gives an average loss rate of 2%, or $462,000 × 2% = $9,240.
The total allowance is $13,500 + $9,240 = $22,740, and the balance sheet shows net receivables of $480,000 minus $22,740 = $457,260. All figures are illustrative.
Allowance for doubtful accounts journal entries
- Increasing the allowance. Debit bad debt expense and credit the allowance.
- Writing off an invoice. Debit the allowance and credit accounts receivable. Net receivables and profit do not change, because the loss was already in the allowance.
- Recovering a written-off invoice. Debit accounts receivable and credit the allowance to reinstate it, then debit cash and credit accounts receivable when the money arrives. ASC 326 notes that some companies credit recoveries straight to earnings instead.
- Reducing the allowance. If expected losses fall, debit the allowance and credit bad debt expense.
How the allowance moves during the year
US GAAP asks you to disclose the year's movement in the allowance, with the expense, write-offs and recoveries shown separately (ASC 326-20-50-13). For the wholesaler, with an opening allowance of $16,500, it looks like this.
| Allowance movement | Amount |
|---|---|
| Opening balance, January 1 | $16,500 |
| Plus bad debt expense for the year | $16,540 |
| Less invoices written off | $11,200 |
| Plus recoveries of earlier write-offs | $900 |
| Closing balance, December 31 | $22,740 |
The expense is the balancing figure. Before the year-end adjustment the allowance held $16,500 minus $11,200 plus $900 = $6,200, so reaching $22,740 takes an expense of $22,740 minus $6,200 = $16,540.
The allowance can only be as accurate as the aging data behind it. Sunbay connects to your ERP or accounting system, matches incoming payments to invoices using ERP data and shows aging and overdue balances per customer, so paid invoices do not linger in the older buckets and inflate the estimate. It flags invoices it predicts will be paid late and keeps every reminder and customer reply next to the invoice, which helps when you decide whether a customer needs an individual assessment. See Sunbay analytics and insights.
Frequently asked questions
Is the allowance for doubtful accounts an asset or a liability?
Neither. It is a contra-asset account with a credit balance that reduces accounts receivable on the asset side of the balance sheet. It is not a liability, because it is not an amount you owe anyone.
What is the difference between a bad debt provision and a write-off?
A provision is an estimate of future losses across many invoices. A write-off removes a specific invoice from your books once you no longer expect to collect it, and under the allowance method it is charged against the provision rather than to profit.
How do you calculate the allowance for doubtful accounts?
Multiply each aging bucket by a loss rate based on your own history, adjusted for current conditions, and add the results. Then add separate estimates for customers you assess individually, such as those in bankruptcy or administration.
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