Allowance for Doubtful Accounts: Journal Entries and Examples

Quick answer: The allowance for doubtful accounts is a contra-asset that estimates how much of your accounts receivable will never be collected. The journal entry to build it is a debit to bad debt expense and a credit to the allowance. When a specific invoice is written off, debit the allowance and credit accounts receivable.

Every business that lets customers pay later will eventually issue an invoice that never gets paid. The allowance for doubtful accounts lets you recognize that cost in the same period as the sale, so your profit and your balance sheet are not overstated. This guide explains how the allowance works, the main estimation methods, every journal entry you will need (with amounts that balance), and how the book treatment differs from the tax deduction. If you need the basics of receivables first, start with our accounts receivable guide.

A note on scope: invoices you create with our free invoice generator become receivables in your books, but the generator itself does not keep a ledger. You will make these entries in your accounting software or spreadsheet. This article is general information, not accounting or tax advice.

What is the allowance for doubtful accounts?

The allowance for doubtful accounts (also called the allowance for credit losses, bad debt reserve or provision for doubtful debts) is a balance sheet account paired with accounts receivable. It has a normal credit balance, which reduces gross receivables to net realizable value: the amount you actually expect to collect.

Balance sheet line	Amount
Accounts receivable	$70,000
Less: allowance for doubtful accounts	($4,150)
Accounts receivable, net	$65,850

Because it is a contra account, it behaves the opposite way to the asset it reduces: credits increase it and debits decrease it. Our debits and credits cheat sheet explains contra accounts alongside the other account types.

Why not just write off bad invoices when they happen?

Accrual accounting aims to match expenses with the revenue they relate to. If you invoice $300,000 this year and expect about 1% of it to go unpaid, that $3,000 loss is a cost of this year's sales. Waiting until next year to record it would overstate this year's profit and understate next year's. It would also overstate receivables on today's balance sheet, which matters to lenders who look at your accounting equation and asset base.

The standards behind it: CECL and IFRS 9

Under US GAAP, credit losses on trade receivables fall under ASC 326, the current expected credit loss (CECL) model, which now applies to private companies as well as public ones. CECL asks you to estimate lifetime expected losses using historical loss experience adjusted for current conditions and reasonable, supportable forecasts. For most small businesses, a well-built aging schedule with rates adjusted for current conditions meets that spirit.

Under IFRS, IFRS 9 uses an expected credit loss model too, and allows a simplified approach for trade receivables that measures the loss allowance at lifetime expected credit losses, often using a provision matrix that looks very similar to an aging schedule. If you report under either framework, confirm your method with your accountant.

Methods to estimate the allowance

Method	How it works	Focus	Best for
Percentage of sales	Apply a historical loss rate to credit sales for the period	Income statement (expense)	Quick monthly estimates, stable customer base
Aging of receivables	Apply higher loss rates to older overdue buckets	Balance sheet (ending allowance)	Most small businesses with an AR aging report
Specific identification	Review large or risky accounts one by one	Individual customers	A few large clients, or known problem accounts
Direct write-off (not an allowance)	Expense only when an invoice is confirmed uncollectible	Actual losses	Tax returns; immaterial bad debts

Many businesses combine methods: an aging schedule for the bulk of receivables plus specific reviews for the largest accounts.

Where do the loss rates come from? Start with your own history. For each of the last two or three years, look at the invoices that sat in each aging bucket at year end and work out what share was never collected. If you have little history, begin with cautious rates, document why you chose them, and refine them as real collection data builds up. Your accountant can help check that the rates are reasonable for your customer base.

How to calculate the allowance using the aging method

1. Run an aging report. Group every open invoice by days past due. Our guide to the accounts receivable aging report shows how to build one.
2. Set a loss rate for each bucket. Base it on the share of invoices in that bucket that went unpaid historically, adjusted for current conditions.
3. Multiply each bucket by its rate and add the results. This is the required ending allowance.
4. Compare with the current allowance balance. The difference is the adjustment you need to record.
5. Post the adjusting entry to bad debt expense and the allowance.
6. Document your assumptions so you and your accountant can review them next period.

Worked example: aging schedule and adjusting entry

A small IT services company has $70,000 of open receivables at December 31. Its loss rates come from the last three years of collection history, nudged up slightly because two clients are in a struggling sector.

Age bucket	Receivables	Estimated loss rate	Required allowance
Not yet due	$40,000	1%	$400
1 to 30 days past due	$15,000	3%	$450
31 to 60 days past due	$8,000	10%	$800
61 to 90 days past due	$4,000	25%	$1,000
Over 90 days past due	$3,000	50%	$1,500
Total	$70,000		$4,150

Check the totals: $40,000 + $15,000 + $8,000 + $4,000 + $3,000 = $70,000, and $400 + $450 + $800 + $1,000 + $1,500 = $4,150.

Entry 1: adjust the allowance

The allowance already has a $1,200 credit balance from last year. The required balance is $4,150, so the adjustment is $4,150 minus $1,200 = $2,950.

Account	Debit	Credit
Bad debt expense	$2,950
Allowance for doubtful accounts		$2,950
Total	$2,950	$2,950

Net receivables are now $70,000 minus $4,150 = $65,850.

Entry 2: write off a specific invoice

In January, a client who owes $1,800 (in the over-90-days bucket) closes down. After documented collection attempts, the company writes the invoice off.

Account	Debit	Credit
Allowance for doubtful accounts	$1,800
Accounts receivable		$1,800
Total	$1,800	$1,800

No expense is recorded now, because it was recognized in Entry 1. Net receivables stay the same: gross receivables fall to $68,200 and the allowance falls to $2,350, and $68,200 minus $2,350 = $65,850.

Entry 3: recover part of a written-off invoice

In March, the closed client's liquidator pays $600. First reinstate that portion of the receivable, then record the cash.

Account	Debit	Credit
Accounts receivable	$600
Allowance for doubtful accounts		$600
Cash	$600
Accounts receivable		$600
Total	$1,200	$1,200

Alternative: the percentage of sales method

If the same company estimated losses at 1% of $300,000 of annual credit sales, it would record $3,000 of bad debt expense (debit bad debt expense $3,000, credit allowance $3,000) regardless of the existing allowance balance. This method is simpler but can let the allowance drift away from what receivables actually look like, so check it against an aging review at least once a year.

What if write-offs exceed the allowance?

Sometimes a bad year produces more write-offs than the allowance can absorb, leaving the account with a temporary debit balance. Suppose the IT company's allowance had been only $1,200 and it wrote off $1,800: the allowance would show a $600 debit balance. At year end, the aging schedule still requires a $4,150 credit balance, so the adjusting entry becomes $4,150 + $600 = $4,750 (debit bad debt expense $4,750, credit allowance $4,750). The larger expense is a signal that past loss rates were too optimistic and should be raised.

Reviewing and presenting the allowance

The allowance is an estimate, so treat it as something you revisit, not a number you set once. A practical routine for a small business:

• Monthly or quarterly: rerun the aging schedule and post a small true-up entry so the allowance tracks your receivables.
• Annually: compare last year's allowance with the write-offs that actually happened. If actual losses were consistently higher or lower, change your rates.
• When conditions change: a major client in difficulty, a downturn in a key customer industry, or a change in your own credit terms all justify adjusting rates before the losses appear.
• Before year end: review every large overdue invoice individually and decide whether it needs a specific allowance or a write-off.

On the balance sheet, show receivables net of the allowance, either as two lines (as in the table at the top of this guide) or as one net figure with the allowance disclosed in the notes. Bad debt expense usually sits within operating expenses on the income statement. If you keep cash-basis books, none of this applies, because you never recorded the receivable as income; our guide to cash vs accrual accounting explains the difference.

Allowance method vs direct write-off method

Feature	Allowance method	Direct write-off method
When expense is recorded	Estimated in the period of the sale	When a specific invoice is deemed uncollectible
Matches expense to revenue	Yes	No, often a later period
Balance sheet receivables	Shown at net realizable value	Overstated until write-off
GAAP and IFRS	Required when losses are material	Acceptable only when immaterial
US tax return	Estimate generally not deductible	Generally how business bad debts are deducted
Write-off entry	Debit allowance, credit receivables	Debit bad debt expense, credit receivables

For the direct method in detail, see our guide to bad debt write-offs.

Tax treatment of bad debts in the US

Your book allowance and your tax deduction usually differ. According to the IRS Topic No. 453 on bad debt deductions, business bad debts can be deducted in full or in part when they become worthless, the deduction is taken in the year the debt becomes worthless, and you must have included the amount owed in gross income in the current or a prior year. That last rule means cash-basis businesses generally cannot deduct unpaid fees they never reported as income.

In practice, accrual-basis businesses deduct actual write-offs on the tax return and add back changes in the book allowance. The timing difference is normal. Talk to a tax professional before claiming a deduction.

Preventing doubtful accounts in the first place

The cheapest bad debt is the one that never happens. Practical steps:

• Set clear terms on every invoice. State the due date, accepted payment methods and late fee policy. Our guide to invoice payment terms has wording you can use.
• Take deposits on large projects so your exposure is limited if a client walks away.
• Follow up early. Collection rates drop as invoices age, which is why older aging buckets carry higher loss rates. See our overdue invoice guide and our broader guide to invoice collections.
• Escalate in stages. A firm, documented sequence of reminders supports both recovery and any eventual write-off. Our sibling guide on writing a demand letter for payment covers the final step before legal action.
• Review credit limits for clients whose payments are slowing.

Create invoices that get paid

An allowance for doubtful accounts protects your financial statements, but clear invoices protect your cash. Use the invoice generator to create professional invoices with due dates, payment terms and unique numbers from the invoice number generator, so every receivable is easy to track, chase and, if it ever comes to it, document. Download the result as a PDF invoice you can email, print or upload to a client portal.