Allowance for Doubtful Accounts and Bad Debt Expense: Entries, Methods and CECL

The allowance for doubtful accounts is a valuation account that reduces accounts receivable to the net amount you expect to collect, and bad debt expense is the entry that adjusts it. You debit bad debt expense and credit the allowance to record the estimate. When a specific account goes bad, you debit the allowance and credit accounts receivable, which never touches the income statement, because the expense was already taken.

That much has been true for decades. What changed is how you get to the number. Under ASC 326 (CECL), the allowance is a forward-looking estimate of expected credit losses, and it applies to ordinary trade receivables, not just to banks. And as of fiscal years beginning after December 15, 2025, there is a new practical expedient that lets any company skip the economic forecasting that made CECL painful. If you are a calendar-year filer, that is live for you right now. Most articles on this topic have not caught up.

Last updated July 2026. This is general information for US GAAP reporters, not accounting advice for your specific facts.

What is the allowance for doubtful accounts?

The allowance for doubtful accounts is an estimate of the portion of your receivables you do not expect to collect. It sits against accounts receivable and reduces it. If you are owed $500,000 and you expect $15,000 of it will never arrive, you carry a $15,000 allowance and your receivables show up as $485,000 net.

ASC 326-20-30-1 calls it a valuation account that is "deducted from, or added to, the amortized cost basis" of the asset to present "the net amount expected to be collected." In plain English it behaves as a contra-asset: a credit-balance account attached to an asset. Note the codification's phrase is net amount expected to be collected, not net realizable value. NRV is legacy language, and a technical reviewer will notice if you use it.

The point of the account is timing. You made the sale and booked the revenue in Q1. If the customer fails in Q3, recognizing the whole loss in Q3 would make Q1 look better than it was and Q3 worse. The allowance puts the estimated loss next to the revenue that created the risk.

What is bad debt expense?

Bad debt expense is the income-statement side of the allowance. ASC 326-20-30-1 is precise about what it represents: "the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses." The codification's own term is credit loss expense, with allowance for credit losses as the balance sheet account. Bad debt expense and allowance for doubtful accounts are still perfectly acceptable labels for trade AR.

The word adjust carries the whole idea and it is the thing people get wrong. Bad debt expense is not computed directly. You determine what the allowance balance ought to be at the reporting date, compare that to what it already is, and the expense is whatever closes the gap.

Does CECL apply to accounts receivable?

Yes. ASC 326-20 covers financial assets carried at amortized cost, and short-term trade receivables are squarely in scope. There is no exemption for receivables that turn over in 30 days. This surprised a lot of private companies, who reasonably assumed a standard aimed at loan portfolios had nothing to do with their AR ledger.

Entity type	CECL effective for fiscal years beginning after
SEC filers, excluding entities eligible to be smaller reporting companies	December 15, 2019
All other entities: SRCs, non-SEC-filer public business entities, private companies, not-for-profits, employee benefit plans	December 15, 2022

Two details worth getting right. The codified category is "SEC filer, excluding entities eligible to be smaller reporting companies," not "large filer," and the SRC determination was fixed as of November 15, 2019. Older articles show a three-bucket table with a separate 2020 date for non-SEC-filer public entities; ASU 2019-10 folded that into the 2022 bucket. If you see the three-bucket version, it is out of date.

The practical consequence of CECL for a normal business: you recognize expected losses earlier, and you have to carry an allowance against receivables that are current and not yet past due. ASC 326-20-30-10 does not let you assume a zero loss except in narrow circumstances. A zero allowance on trade AR is possible but rare, and you need support for it.

The 2026 change: the ASU 2025-05 practical expedient

This is the part almost nobody has written about yet. FASB issued ASU 2025-05 on July 30, 2025, and it takes the worst part of CECL off the table for receivables.

The original problem: estimating lifetime expected losses required "reasonable and supportable forecasts of future economic conditions." For a bank with a 30-year mortgage book, forecasting unemployment is a reasonable ask. For a manufacturer with net-30 invoices, building an economic forecast to reserve against receivables that will resolve in six weeks was expensive theater.

ASC 326-20-30-10C now lets an entity elect a practical expedient to "assume that current conditions as of the balance sheet date do not change for the remaining life of the asset." No forecasting required.

Question	Answer
Who can elect it?	All entities, public and private. It was proposed as private-company-only, then expanded before the final ASU.
What does it cover?	Current accounts receivable and current contract assets from ASC 606 transactions.
What counts as current?	A one-year period, unless your operating cycle is longer, in which case the longer period applies.
Effective when?	Annual periods beginning after December 15, 2025, and interim periods within them. Early adoption permitted.
Transition	Prospective.
Consistency	Must be applied to all in-scope balances, not cherry-picked.

It is not a free pass. ASC 326-20-30-10D still requires you to "continue to adjust historical loss information to reflect current conditions" where your history does not already capture them. FASB's own examples of conditions you cannot ignore: a specific customer in financial distress even if they have not defaulted yet, a decision to extend credit to lower-quality customers, or a severe recession that began before the balance sheet date. You are freezing the forecast, not your eyes.

There is a second, narrower election for non-public entities. Under ASC 326-20-30-10E, a non-PBE that elects the expedient may also elect to consider collection activity after the balance sheet date but before the statements are available to be issued. The effect is intuitive: if the customer paid in January, the allowance against that December balance is zero. You know the answer, so you are allowed to use it. If you make that election, you must disclose the date through which you considered collections, in annual periods.

Allowance for doubtful accounts journal entry

Three entries cover the life cycle. They are simpler than the estimate that feeds them.

1. Recording bad debt expense

Dr  Bad Debt Expense                          6,681
    Cr  Allowance for Doubtful Accounts       6,681

This is the adjusting entry at the reporting date. The amount is not "the estimate." It is the amount that moves the existing allowance balance to the estimate, which is the distinction the next section is about.

2. Writing off a specific account

Dr  Allowance for Doubtful Accounts           4,200
    Cr  Accounts Receivable                   4,200

Per ASC 326-20-35-8, write-offs "shall be deducted from the allowance" and recorded in the period the asset is "deemed uncollectible." Notice what is absent: any income statement account. The expense was recognized when you built the allowance. A write-off just moves a known loss out of gross AR and out of the reserve you set aside for it, so total assets do not change.

ASC 326 does not define "deemed uncollectible." The practical read is: no later than when your collection efforts are genuinely exhausted.

3. Recovering an account you already wrote off

Here there are two acceptable presentations, and textbooks tend to teach only one. The conventional two-step reinstates the receivable and then collects it:

Dr  Accounts Receivable                       4,200
    Cr  Allowance for Doubtful Accounts       4,200

Dr  Cash                                      4,200
    Cr  Accounts Receivable                   4,200

The alternative is to debit cash and credit credit loss expense directly. Both are acceptable, and both land in the same place once the allowance is trued up at period end. Financial institutions typically credit the allowance; entities in other industries often credit the expense. Do not let anyone tell you the two-step reinstatement is the only GAAP-permitted treatment. It is a textbook convention, not an ASC 326 requirement.

Percentage of sales vs percentage of receivables

These are the two classic estimation approaches, and the difference between them is exactly the one that trips people up on the entry.

	Percentage of sales	Percentage of receivables (including aging)
Approach	Income statement	Balance sheet
Applied to	Credit sales for the period	Ending AR balance
The percentage gives you	The expense, directly	The required ending allowance balance
Existing allowance balance	Ignored	Drives the entry: expense is the plug
Goal	Match expense to the period's revenue	State AR at the net amount expected to be collected

One caveat matters more than the table. ASC 326-20-30-1 requires the amount necessary to adjust the allowance to management's current estimate at the reporting date, which is inherently a balance-sheet-target measurement. A pure percentage-of-sales approach that books a rate against sales and never trues the allowance up to a reporting-date estimate does not get you there. In practice it survives as an interim accrual convention that has to be trued up at each reporting date.

To be precise about the authority: FASB does not name and ban percentage-of-sales. ASC 326-20-30-3 lists acceptable methods (discounted cash flow, loss-rate, roll-rate, probability-of-default, or methods using an aging schedule) and ASC 326-20-55-7 says the subtopic does not require specific approaches. Percentage-of-sales is not on the list, but the list is not exclusive. The conclusion above follows from the reporting-date requirement rather than from a prohibition.

Why is the direct write-off method not GAAP?

The direct write-off method skips the allowance entirely: when an account goes bad, you debit bad debt expense and credit accounts receivable. Nothing is recorded until then.

The usual explanation is that it violates the matching principle, and that is a fair plain-English description: the loss lands in a later period than the revenue it belongs to. But if you want the actual authority, cite ASC 326-20-30-1, which says an entity shall record an allowance for credit losses on in-scope financial assets at the reporting date. The direct write-off method records no allowance, so it fails that requirement. There is no ASC paragraph that names the direct write-off method and prohibits it, and "matching" is not a formally defined principle in FASB's current conceptual framework. The allowance requirement is the citation that holds up.

When can you use it? When the amounts are immaterial. That is a general materiality argument rather than a codified exception, so treat it as a convention, not a rule.

Why does the IRS make you use the direct write-off method?

Because tax and GAAP are answering different questions. Under IRC section 166, non-bank taxpayers must use the specific charge-off method: you deduct a bad debt when it actually becomes worthless, not when you estimate it might. A reserve method is not permitted, and a taxpayer on one must change to a specific charge-off method that complies with section 166. Banks are the carve-out, under section 585 for qualifying small banks and the conformity election in the regulations.

The reason is that a deduction based on management's estimate would be a deduction based on management's discretion. So you keep two sets of numbers: a GAAP allowance that is not deductible, and tax deductions taken as accounts actually go worthless. The gap between them is a temporary difference that produces a deferred tax asset. This is not an error, and it is not something to reconcile away. It is the expected outcome of two systems with different jobs.

How do you calculate the allowance for doubtful accounts?

The most common method for trade receivables is an aging schedule, sometimes called a provision matrix: sort receivables into buckets by days past due, apply a loss rate to each bucket, and sum to the required allowance. ASC 326-20-30-3 explicitly blesses "methods that utilize an aging schedule," and FASB provides a worked trade-receivables example in ASC 326-20-55-37. We walk through that example, the bucket rates, and the plug arithmetic in the aging of accounts receivable method guide.

Whatever method you use, the loss rates have to be yours. They come from your own historical loss experience, adjusted for current conditions, and (unless you elect the ASU 2025-05 expedient) reasonable and supportable forecasts. There are no GAAP-prescribed percentages, and borrowing another company's rates because they are in the same industry is not support. You also have to pool receivables by similar risk characteristics rather than applying one rate to everything.

What the allowance is really telling you

An allowance is a forecast of your own failure, and it is worth reading as one. A rising allowance against a stable customer base is not an accounting event, it is a collections event that accounting noticed first. The estimate went up because the aging got worse, and the aging got worse because invoices sat.

This is where the accounting and the operations meet. Under CECL, the loss rate you apply to each bucket is derived from your own history: how often does an invoice in your 61-to-90 bucket actually go bad? Improve follow-up and fewer invoices reach that bucket, so both the exposure and, over time, the rate come down. The allowance shrinks because the business got better, not because someone argued for a friendlier assumption. When you present the allowance and the write-off roll-forward to a board or a lender, those lines have to tie back to the ledger, which is much easier when the reporting is generated from the accounting export rather than rebuilt by hand into board-ready financial statements every quarter.

The lever is unglamorous: someone has to follow up on every overdue invoice, every time. That is the job accounts receivable automation software is meant to take over. AccountsReceivable.ai chases every open invoice across email, SMS and live AI phone calls, applies incoming cash so the aging that feeds your estimate is accurate, and predicts a pay date per customer. You still book the allowance. You just book a smaller one, and you can defend it. For the metrics that move first, see the accounts receivable KPIs guide.