Allowance For Doubtful Accounts

AAA

DEFINITION of 'Allowance For Doubtful Accounts'

A contra-asset account that records the portion of a company's receivables, which it expects may not be collected. The allowance for doubtful accounts is only an estimate of the amount of accounts receivable which are expected to not be paid. The actual payment behavior of customers may differ substantially from the estimate.

INVESTOPEDIA EXPLAINS 'Allowance For Doubtful Accounts'

Losses due to bad debt are an unfortunate part of any business which extends credit to its customers. Even businesses which are extremely diligent about their credit and collections policies can expect that a certain percentage of accounts will go bad when customers either refuse to pay or are unable to pay.

Normally, the allowance for doubtful accounts is estimated based on the company's past experience. For example, the company may identify that it expects 4% of its sales to become bad debt, and thus it will adjust the allowance for doubtful accounts each quarter to ensure that this expected loss is reflected on the company's financial statements.

RELATED TERMS
  1. Doubtful Loan

    A loan where full repayment is questionable and uncertain. Degree ...
  2. Allowance For Bad Debt

    A valuation account used to estimate the portion of a bank's ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
  4. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  5. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  6. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
Related Articles
  1. When is revenue recognized under accrual ...
    Fundamental Analysis

    When is revenue recognized under accrual ...

  2. Reading The Balance Sheet
    Investing Basics

    Reading The Balance Sheet

  3. What happens if a company doesn't think ...
    Investing

    What happens if a company doesn't think ...

  4. Payback Period
    Investing

    Payback Period

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center