Allowance for Doubtful Accounts: Estimate and Reconcile

An allowance for doubtful accounts reduces gross receivables to a supported carrying amount for expected credit losses. Estimate the required closing balance, then reconcile the existing allowance before calculating the provision; the required balance is not automatically this period’s expense.

All amounts and operating results below are original fictional teaching examples in USD. They are not customer results, industry averages or forecasts. Use your own dated records and applicable accounting policies.

State the reporting framework and current policy choices

This educational example uses US GAAP credit-loss terminology for ordinary trade receivables. It is not a complete ASC 326 model or a substitute for entity-specific accounting review. Aging percentages are fictional assumptions, not prescribed rates. Assess relevant experience, current conditions, customer-specific evidence and the applicable forecasting requirements.

FASB ASU 2025-05 introduced optional simplifications for in-scope current receivables and contract assets. A current-conditions practical expedient and, for qualifying nonpublic entities using it, a subsequent-collections policy election require their own scope and disclosure assessment. The example below assumes neither election. Do not infer that every entity must use the same forecast or subsequent-cash treatment.

Build the closing estimate from a defined receivables population

The three amounts reconcile to $80,000 gross AR. The required closing allowance is $500 + $800 + $1,500 = $2,800, giving a $77,200 net carrying amount. Review whether similar risk characteristics support the grouping and whether any balance needs separate assessment. Avoid applying both a pooled rate and a second specific allowance to the same exposure without reconciling the overlap.

A bucket percentage must have a defensible basis and an update process in a real model. The arithmetic alone does not establish a compliant loss estimate. Preserve how credits, disputes, write-offs and subsequent evidence affect the population and rates.

Reconcile the existing allowance before recording the provision

Opening credit $1,200 − $700 write-offs + $200 recovery reinstatement leaves $700 credit before the new provision. To reach $2,800, record a $2,100 provision: Dr Credit Loss / Bad Debt Expense, Cr Allowance. Recording the entire $2,800 as new expense would overstate this example’s provision by $700.

If the pre-adjustment allowance instead had a $300 debit balance, reaching $2,800 credit would require a $3,100 credit provision. Keep debit and credit signs visible; subtracting an unsigned balance can produce the wrong answer.

Reconcile gross and net AR as well as the allowance

For the same fictional period, opening gross AR is $60,000. Add $40,000 credit sales, deduct $19,300 ordinary collections and $700 write-offs, reinstate $200 recovered receivable and collect that $200. Closing gross AR is $80,000. Total collections are $19,500, including the recovery; do not deduct that recovery twice.

Opening net AR is $60,000 − $1,200 = $58,800. Add $40,000 credit sales, deduct $19,500 cash collections and $2,100 provision to get $77,200 closing net AR. A write-off against an existing allowance reduces gross AR and allowance together, so it does not by itself create a second net-AR loss in this model.

Keep approval, evidence and estimation separate

Support write-offs and recoveries with approved customer records. Reconcile the detailed customer ledger to the gross AR control, and the allowance schedule to its own control account. A customer promise is not collected cash; a write-off is not a cash payment. Document the estimate owner, review date and changes in assumptions.

Use the receivable workflow for invoice detail and the bad-debt expense guide for the event-by-event provision, write-off and recovery entries. The current-assets guide explains gross versus net presentation. Tax deductibility is a separate determination and is not established by an allowance entry.

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Sources and scope

Primary references below support the stated definitions or framework. The worked case, numbers and decision records are original MyBreakeven material. Reviewed November 7, 2026; no external professional sign-off is claimed.

• FASB ASU 2025-05: current receivables measurement options
• FASB staff Q&A: estimating expected credit losses
• OpenStax: allowance-account mechanics; not a complete current CECL model