Allowance For Doubtful Accounts
AllowanceForDoubtfulAccountsReceivableCurrentAllowanceForDoubtfulAccountsReceivableProvisionForDoubtfulAccountsThe allowance for doubtful accounts is a reserve a company sets against its receivables for the portion it does not expect to collect. It is a contra-asset: it is deducted from gross accounts receivable so that the balance sheet shows receivables at the amount the company actually expects to receive. Under current US GAAP it is called the allowance for credit losses.
The allowance is an estimate, not a record of specific defaults. It rises when the company records credit-loss expense and falls when it writes off accounts it has given up on collecting.
Regulation S-X Rule 5-02.4 requires the allowance for doubtful accounts and notes receivable to be stated separately, on the balance sheet or in a note. Since the current expected credit loss model in ASC 326 (known as CECL) took effect, companies measure the allowance based on losses they expect over the whole life of the receivable, using past experience, current conditions, and reasonable forecasts. The older approach recorded a loss only once it had become probable. In XBRL filings the current allowance on trade receivables is tagged AllowanceForDoubtfulAccountsReceivableCurrent, and the period's charge to earnings is tagged ProvisionForDoubtfulAccounts.
Movements in the allowance follow a simple roll-forward: the opening balance, plus the provision charged to expense, minus write-offs, plus recoveries of amounts previously written off. Companies disclose this roll-forward in their footnotes. A write-off by itself does not hit earnings; the income-statement cost was already taken when the provision was recorded.
Because the size of the allowance depends on management's judgment, it is one of the places earnings can be shaped. Cutting the provision raises reported profit in the current period. Analysts compare the allowance with gross receivables over time and with peers. A falling reserve ratio while receivables are aging, or while days sales outstanding is rising, suggests the company may be under-reserving. A sudden jump often marks a customer in distress or a weaker economic outlook.
A: Yes, for receivables. "Allowance for credit losses" is the term used under ASC 326, which replaced the older incurred-loss approach. Many companies and analysts still use the traditional name.
A: The allowance is a balance-sheet reserve. Bad debt expense, or credit-loss expense, is the income-statement charge that adds to that reserve each period.
A: The cost was recognized earlier, when the company recorded the provision. Writing off a specific account simply lowers both gross receivables and the allowance by the same amount, leaving net receivables unchanged.
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