allowance method for bad debts expense definition

Under this method of recognizing losses on credit sales, a contra asset account Allowance for Doubtful Accounts is reported on the balance sheet. Prior to specifically identifying an account receivable as uncollectible, a company debits Bad Debts Expense and credits Allowance for Doubtful Accounts for an estimated amount. The estimate could be based on a percentage of sales or it could be based on the age of its accounts receivables.