The allowance for doubtful accounts is a contra-asset estimating the portion of receivables not expected to be collected, so the balance sheet shows realistic collectible value.
Not every receivable gets paid. The allowance for doubtful accounts is an estimate of the uncollectible portion, recorded as a contra-asset that reduces accounts receivable to its expected collectible value. This follows the accrual principle of matching the expected bad-debt expense to the period the sales were made.
The allowance (an accounting estimate) differs from an actual bad-debt write-off, and from the tax treatment, where a reserve for doubtful debts has its own rules and only specific bad debts are deductible. When a specific account is later confirmed uncollectible, it is written off against the allowance.
A company with $200,000 of receivables estimates 3% will not be paid. It records a $6,000 allowance, showing net receivables of $194,000, and matches the expected loss to the period the sales occurred.
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