To record an allowance for doubtful accounts, the journal entry is a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for the amount you estimate you won’t collect. You post that adjusting entry at the end of each reporting period. When a specific customer’s balance is later confirmed uncollectible, a second entry debits the allowance and credits Accounts Receivable to remove the account. If the customer eventually pays, you reverse the write-off and then record the cash. Those three entries — the periodic estimate, the write-off, and the recovery — are the full mechanic.
The Periodic Adjusting Entry
At period end, you estimate the portion of your receivables that won’t be collected and book it:
- Debit Bad Debt Expense
- Credit Allowance for Doubtful Accounts
1Cornell University Division of Financial Services. Allowance for Doubtful Accounts and Bad Debt Expenses The debit runs through the income statement and reduces net income for the period. The credit sits on the balance sheet as a contra-asset that offsets gross Accounts Receivable, producing Net Realizable Value — the cash you actually expect to collect. If gross receivables are $200,000 and the allowance carries an $8,000 credit balance, net receivables show as $192,000.
The structure of the entry never changes. What changes is how you arrive at the dollar amount, and that depends on which estimation method you use.
Percentage of Sales
Apply your historical uncollectibility rate to the period’s credit sales. If credit sales are $500,000 and your historical rate is 1.5%, the estimate is $7,500. Book that full amount regardless of whatever balance already sits in the allowance account:
- Debit Bad Debt Expense $7,500
- Credit Allowance for Doubtful Accounts $7,500
This method ignores the existing allowance balance on purpose. Its job is matching the expense to the current period’s revenue, not hitting a specific balance sheet number.
Aging of Receivables
The aging method flips the calculation. Instead of computing the expense directly, you compute what the ending balance of the allowance account should be, then plug the difference.
Sort outstanding invoices into age buckets and apply a progressively higher uncollectibility rate to each. A simplified schedule:
- Current (0–30 days), $150,000 balance, 1% uncollectible = $1,500
- 31–60 days, $40,000, 5% = $2,000
- 61–90 days, $20,000, 15% = $3,000
- Over 90 days, $10,000, 40% = $4,000
Total required allowance balance: $10,500. Now check what the allowance account currently holds and book the difference.
If the allowance already carries a $2,000 credit balance:
- Debit Bad Debt Expense $8,500
- Credit Allowance for Doubtful Accounts $8,500
If write-offs during the period exceeded prior estimates and the allowance has flipped to a $500 debit balance, you need $11,000 to eliminate the deficit and land at the $10,500 target:
- Debit Bad Debt Expense $11,000
- Credit Allowance for Doubtful Accounts $11,000
A pre-adjustment debit balance in the allowance is a signal that your uncollectibility rates are running too low. The aging method self-corrects because you recalculate the target from scratch every period.
Writing Off a Specific Account
The adjusting entry deals with the pool of receivables in aggregate. When a specific customer’s balance is confirmed uncollectible — a bankruptcy filing, collection cost exceeding the debt, or the account sitting delinquent past any reasonable hope of recovery — you remove it with a separate write-off entry:
- Debit Allowance for Doubtful Accounts
- Credit Accounts Receivable (customer’s balance)
Notice what this entry does not touch: Bad Debt Expense. The expense was already recognized in the prior adjusting entry. The write-off just moves the loss out of the estimated pool and applies it to the specific account.
Because gross Accounts Receivable and the allowance drop by the same amount, Net Realizable Value doesn’t change. Writing off a $3,000 account takes gross receivables from $200,000 to $197,000 and the allowance from $10,500 to $7,500. Net receivables stay at $189,500. The write-off is a reclassification between two balance sheet accounts, not a new expense.
Recording a Recovery
If a customer whose account you already wrote off later pays, use two entries rather than one. The two-step process preserves the payment history in your records, which matters for future credit decisions.
Step one — reinstate the receivable:
- Debit Accounts Receivable
- Credit Allowance for Doubtful Accounts
Step two — record the cash collection:
- Debit Cash
- Credit Accounts Receivable
You end with more cash, a restored allowance balance, and a clean audit trail showing the receivable was reinstated before collection. Collapsing this into a single Cash-to-Allowance entry works arithmetically but erases the documentation.
A Full Sequence in One Period
Putting the entries together, a typical sequence for one customer looks like this. During Q1, you estimate $10,500 in uncollectibles and book the adjusting entry (debit Bad Debt Expense $10,500, credit Allowance $10,500). In Q3, customer Smith’s $3,000 balance is confirmed worthless, so you write it off (debit Allowance $3,000, credit Accounts Receivable — Smith $3,000). In Q4, Smith unexpectedly sends a check for the full $3,000. You reinstate (debit Accounts Receivable — Smith $3,000, credit Allowance $3,000) and then record the cash (debit Cash $3,000, credit Accounts Receivable — Smith $3,000).
Bad Debt Expense hits the income statement once, in Q1. The write-off and the recovery move dollars between balance sheet accounts without touching the expense line again.
How the Entries Show Up on the Statements
On the balance sheet, Accounts Receivable is presented gross with the allowance shown as a subtraction, and Net Realizable Value is what a reader sees as the practical amount.1Cornell University Division of Financial Services. Allowance for Doubtful Accounts and Bad Debt Expenses On the income statement, Bad Debt Expense reduces operating results in the period the adjusting entry is made. That timing — expense in the period of the sale rather than the period of the eventual default — is the whole reason the allowance method exists.
Forward-Looking Estimates Under CECL
The mechanical entries above haven’t changed, but the numbers behind them have, for entities subject to ASC 326 (the Current Expected Credit Losses standard). CECL is mandatory for all public companies and most private entities with calendar year-ends as of January 2023.2SupervisionOutreach.org. Key Dates Under CECL, your estimate must reflect expected credit losses over the entire remaining life of the asset and incorporate reasonable, supportable forecasts of future economic conditions rather than resting on historical loss rates alone.3FASB. FASB Staff Q&A – Topic 326, No. 2 – Developing an Estimate of Expected Credit Losses An aging schedule still works as the mechanism, provided the percentages you apply are forward-looking.
Tax Treatment Is Separate
The entries described here are for financial reporting. For federal tax purposes, the IRS does not allow most businesses to use the reserve (allowance) method. Under 26 U.S.C. § 166, you deduct a bad debt only when a specific debt becomes wholly or partially worthless during the tax year.4Office of the Law Revision Counsel. 26 USC 166 – Bad Debts The debt must have been previously included in gross income, and you have to be able to show reasonable steps to collect.5Internal Revenue Service. Topic No. 453, Bad Debt Deduction The timing is strict — the deduction belongs to the year of worthlessness, and missing that year generally forfeits it. Your GAAP allowance and your tax bad debt schedule will not match, and they aren’t supposed to.