What is Allowance for Doubtful Accounts?
The reserve that sits against receivables so the balance sheet shows what you actually expect to collect.
Allowance for Doubtful Accounts: definition
Rather than waiting for specific invoices to fail, the allowance recognizes expected losses in advance so receivables are not overstated. It is netted against accounts receivable on the balance sheet: gross AR minus the allowance equals net receivables - the amount you realistically expect in cash.
Net realizable value of receivables
Net AR = Gross Accounts Receivable − Allowance for Doubtful Accounts
The allowance grows when you record bad debt expense and shrinks when you write off specific uncollectible invoices against it.
How Fintra handles it
Fintra maintains the allowance as a live figure driven by AR aging and your historical collection rates, not a static number typed once a year. The AI proposes the period adjustment to the allowance, shows the aging that supports it, and posts only after a human approves - so net receivables stay defensible for auditors and lenders.
- Allowance recalculated each close from aging buckets and collection history
- Write-offs hit the allowance, not the P&L, keeping expense timing clean
- Reconciliation ties the allowance rollforward to bad debt expense and write-offs
Worked example
| Aging bucket | Balance | Est. uncollectible % | Allowance |
|---|---|---|---|
| Current (0–30d) | $120,000 | 1% | $1,200 |
| 31–60 days | $40,000 | 4% | $1,600 |
| 61–90 days | $18,000 | 15% | $2,700 |
| 90+ days | $9,000 | 40% | $3,600 |
| Total | $187,000 | - | $9,100 |
Frequently asked questions
Is the allowance for doubtful accounts an asset?
It is a contra-asset - it lives in the asset section but carries a credit balance and reduces gross accounts receivable. On its own it is negative; combined with AR it produces net realizable value.
How is the allowance different from a write-off?
The allowance is an estimate of future uncollectibles held as a reserve; a write-off removes a specific dead invoice from AR by drawing down that reserve. You build the allowance in advance, then use it up as individual accounts fail.
What percentage should the allowance be?
There is no fixed rate - it depends on your customers, terms, and history. Aging-based estimates apply higher percentages to older buckets. The best input is your own collection experience, which is why Fintra derives the rate from your data rather than an industry default.
Does a small business need an allowance?
If you sell on credit and follow GAAP, yes - the allowance method is required so receivables are not overstated. Very small cash-basis businesses may use direct write-offs instead. Fintra supports both and keeps the allowance current if you use it.
Stay in the loop
One practical finance briefing a week - new guides, checklists, and benchmarks.
See how Fintra handles the numbers behind this term
Fintra is the AI Finance Operating System for SMBs - accounting, planning, payroll, equity, and AI governance on one shared data model, with a named human approving anything consequential. Free to start, no card required.
Talk to us