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

Definition of Allowance for Doubtful Accounts

The Allowance for Doubtful Accounts is a contra asset account that is used with the balance in Accounts Receivable to report the net realizable value of the receivables.

Example of Adjusting the Allowance for Doubtful Accounts

The balance in the account Allowance for Doubtful Accounts should be the estimated amount of the company's receivables that will not be turning to cash. For example, if the Allowance for Doubtful Accounts presently has a credit balance of $2,000 and you believe there is a total of $2,900 in Accounts Receivable that will not be collected, you need to enter an additional credit amount of $900 into the Allowance for Doubtful Accounts. The other part of this adjusting entry will be a debit of $900 to Bad Debts Expense.

Note that some authors and companies may refer to the allowance account as Allowance for Uncollectible Expense, Allowance for Bad Debts or Provision for Bad Debts. The related income statement account could have the title of Uncollectible Accounts Expense, Doubtful Accounts Expense, etc.