Allowance for Doubtful Accounts

Definition

A contra-asset account estimating receivables that customers will never pay, because optimism doesn't belong on a balance sheet. It's acknowledging reality before reality forces you to.

Example Usage

We increased the allowance for doubtful accounts to 8% of receivables after three major customers filed for bankruptcy.

Origin

Standard practice under accrual accounting and matching principle requirements

Fun Fact

Companies that keep their allowance too low get dinged by auditors for being unrealistically optimistic, while those with high allowances get criticized for earnings management—you can't win.

Source: GAAP accounting for accounts receivable

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