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Accounting
Allowance for Doubtful Accounts
A special account that estimates how much of your accounts receivable probably won't be collected.
The allowance is a contra-asset account that reduces accounts receivable on the balance sheet. It follows the matching principle by recording the estimated loss in the same period as the sale.It's like setting aside a few cookies from the batch because you know some kids might drop theirs on the ground.
Real world: A company with $100,000 in customer invoices estimates $3,000 will never be paid, so it creates a $3,000 allowance and records bad debt expense.
💡 The allowance for doubtful accounts keeps your balance sheet realistic — it shows what you actually expect to collect, not just what customers owe.