Allowance for Doubtful Accounts | Provision for Bad Debts | Reserve for Uncollectible Accounts
Allowance for Doubtful Accounts, or Provision for Bad Debts, is a contra-asset account with a credit balance, used to estimate the portion of uncollectible Accounts Receivable from buyers who are not expected to pay for their purchases so that balance sheet shows receivables at net realizable value.
The contra-asset account for Accounts Receivable is known as Allowance for Doubtful Accounts, Provision for Bad Debts, or Reserve for Uncollectible Accounts–or any other variation of these terms, which are used interchangeably based on the applicable accounting standards and best practices.
Allowance | Provision | Reserve
Doubtful Accounts | Bad Debts | Uncollectible Accounts
|Accounts Receivable Contra-Account: Alternative Titles|
|Interchangeable Terms||Doubtful Accounts||Uncollectible Accounts||Bad Debts|
|Allowance||Allowance for Doubtful Accounts||Allowance for Uncollectible Accounts||Allowance for Bad Debts|
|Reserve||Reserve for Doubtful Accounts||Reserve for Uncollectible Accounts||Reserve for Bad Debts|
|Provision||Provision for Doubtful Accounts||Provision for Uncollectible Accounts||Provision for Bad Debts|
The titles of contra accounts receivable can differ across jurisdictions and entities.
For example, the accounting profession in the United States encourages the use of the terms allowance, provision or accumulated rather than a reserve, which could be misinterpreted as money set aside.
In other cases, doubtful accounts and uncollectible bad debts may have very distinct meaning and accounting treatment, such as:
|Doubtful Accounts vs. Bad Debts|
|Doubtful | Bad Debts||Definition||Accounting Treatment|
|Uncollectible Bad Debts||Specific identified accounts receivable that cannot be collected by a business from customers who will not pay.||Write off as an expense immediately|
|Doubtful Accounts||Estimated portion of receivables that is unlikely to be collected by a business from its customers and may become a bad debt at some point in the future.||Create an allowance or provision contra asset account|
Allowance for Doubtful Accounts (aka Bad Debt Provision or Uncollectible Accounts Reserve) has a credit balance and is credited when increased because it is a contra to the asset account Accounts Receivable, which has a debit balance and is debited when increased.
|Debit or Credit - Doubtful Accounts & Uncollectible Bad Debts|
|Account Name||Account Type||Debit||Credit|
|Accounts Receivable||Parent asset account||Increase||Decrease|
|Allowance for Doubtful Accounts (Provision for Bad Debts)||Contra asset account||Decrease||Increase|
The journal entry to record the estimated amount of uncollectible accounts receivable is a debit to a Bad Debts expense account and a credit to an Allowance for Doubtful Accounts contra-asset account.
As an example, let’s say that Company A reports credit sales of $100,000 and it estimates that 2% of the receivables will default. The journal entry would look as follows:
|Journal Entry - Doubtful Accounts & Uncollectible Bad Debts|
|Account Name||Account Type||Financial Statement||Debit||Credit|
|Bad Debt Expense||Expense||Income Statement||$2,000|
|Allowance for Doubtful Accounts (Provision for Bad Debts)||Contra asset account||Balance Sheet||$2,000|
Bad Debt Expense is presented on an income statement under operating expenses and the contra-account is reported on a balance sheet in the asset section, immediately below Accounts Receivable to reduce the current balance of receivables by the estimated Allowance for Doubtful Accounts and Bad Debts.
Using the same example as per above, the balance sheet of Company A would look as follows:
|Balance Sheet: Company A – 31 December 20XX|
|Accounts Receivable - Gross||Asset||$100,000|
|(Less: Allowance for Doubtful Accounts and Bad Debts)||(Contra Asset)||($2,000)|
|Accounts Receivable - Net||Current Net Realizable Value||$98,000|
This three-line breakdown of the Accounts Receivable asset enables balance sheet users to clearly see that even though customers owe $100,000 to Company A for past purchases (Gross Accounts Receivable), the company wrote off $2,000 as an operating expense (Allowance for Doubtful Accounts and Uncollectible Bad Debts) because it expects to turn only $98,000 into cash (Net Realizable Value).
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