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What to do with the balance in Allowance for Doubtful Accounts?

You need to adjust the balance in the contra asset account Allowance for Doubtful Accounts to be your best estimate of the amount in Accounts Receivable which are not collectible. In other words, adjust the credit balance in the allowance account to become the amount of the receivables that is not expected to turn to cash.

If the Allowance for Doubtful Accounts presently has a credit balance of $2,000 and you believe there is a total of $2,900 of accounts receivable that will not be collected, you need to enter an additional credit of $900 into the Allowance for Doubtful Accounts, and you need to enter a debit of $900 into Bad Debts Expense.

The allowance account appearing on the balance sheet might be titled Allowance for Uncollectible Accounts, Provision for Bad Debts, or some combination of these. The income statement account might have a title such as Uncollectible Accounts Expense, Doubtful Accounts Expense, etc.