The allowance reserve is set in the period in which the revenue was “earned,” but the estimation occurs before the actual transactions and customers can be identified. Contra-Asset → Negative Asset Account to Offset the Coinciding Asset’s Balance.On the balance sheet, an allowance for doubtful accounts is considered a “contra- asset” because an increase reduces the accounts receivable (A/R) account. The allowance for doubtful accounts is management’s objective estimate of their company’s receivables that are unlikely to be paid by customers. GAAP Accounting - Allowance for Doubtful Accounts The allowance for doubtful accounts is then used to approximate the percentage of “uncollectible” accounts receivable (A/R). not cash) as revenue on the income statement and accounts receivable on the balance sheet. In accordance with GAAP revenue recognition policies, the company must still record credit sales (i.e.
The allowance for doubtful accounts (or the “bad debt” reserve) appears on the balance sheet to anticipate credit sales where the customer cannot fulfill their payment obligations.Ĭredit sales all come with some degree of risk that the customer might not hold up their end of the transaction (i.e. The allowance for doubtful accounts reduces the carrying value of accounts receivable on the balance sheet. Example of Allowance for Doubtful Accounts.
Allowance for Doubtful Accounts Overview.