Allowance for Doubtful Accounts

Code: 1143
👁 Views: 132

Account Information

Financial Statement Statement of Financial Position
Normal Balance Credit

Definition

This allowance estimates the portion of customer balances expected to be uncollectible, based on past experience or aging analysis.

Common Journal Entries

Estimate allowance for doubtful accounts based on percentage of receivables

Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts

Increase allowance for doubtful accounts after aging analysis

Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts

Reduce allowance for doubtful accounts (reverse excess allowance)

Dr. Allowance for Doubtful Accounts
Cr. Bad Debt Expense

Write off a customer's debt that became uncollectible after confirmation

Dr. Allowance for Doubtful Accounts
Cr. Accounts Receivable (specific customer)

📐 IFRS vs US GAAP Accounting Treatment

IFRS IFRS 9 Financial Instruments
US GAAP ASC 326 Credit Losses

❓ Frequently Asked Questions

Q: How is the allowance for doubtful accounts estimated?

A: Estimation is based on aging analysis of receivables, historical collection experience, current economic conditions, and percentage applied to different aging categories.

Q: How does the allowance for doubtful accounts affect net income?

A: When the allowance is created or increased, bad debt expense is charged on the income statement, reducing net income.

Q: Can the allowance balance exceed total receivables?

A: Rare, but if the estimate indicates expected credit losses exceed total receivables, it is better to write off uncollectible receivables first.

Q: What is the difference between percentage of sales and aging methods?

A: Percentage of sales: based on a fixed percentage of credit sales. Aging analysis: based on classifying receivables into aging categories with different percentages (more accurate).