Glossary · Accounting
Allowance for doubtful accounts
Also called Bad debt provision, Provision for doubtful debts, Expected credit loss allowance
The allowance for doubtful accounts is an estimate of receivables that won’t be collected, deducted to show what receivables are realistically worth.
Rather than waiting for specific debts to go bad, a business estimates how much of its receivables it will lose and records that as an allowance against them. Receivables are reported net of the allowance.
Estimates usually come from the aging report and history: a small percentage of current balances, larger ones for older buckets, plus specific provisions for customers known to be in trouble. Under IFRS 9, companies use an expected credit loss model, with a simplified approach for trade receivables; in the US, the CECL model under ASC 326 applies.
When a specific debt is written off, it is charged against the allowance rather than straight to profit.
Example
A firm has €200,000 of receivables: €150,000 current (1% provision), €40,000 at 31–90 days (5%) and €10,000 over 90 days (40%). The allowance is €1,500 + €2,000 + €4,000 = €7,500, and net receivables are €192,500.