Allowance for Doubtful Accounts vs Bad Debt Expense: How Do You Solve the Plug?
Draw the allowance account. The rollforward connects the balance-sheet allowance with the period's bad debt expense.
The core rollforward
Think: beginning allowance + bad debt expense + applicable recoveries − write-offs = ending allowance. The exact recovery sequence can involve reinstating the receivable before collecting it, but the key is knowing which events increase or decrease the allowance.
Write-offs
Under the allowance method, writing off a receivable generally debits allowance for doubtful accounts and credits accounts receivable. Bad debt expense is not recorded again at the write-off date because the expense was estimated earlier.
Effect on net receivables
A write-off reduces gross accounts receivable and the allowance by the same amount, so net realizable value generally does not change solely because of the write-off.
Aging method
An aging schedule generally estimates the desired ending allowance balance. If beginning allowance, write-offs, recoveries, and desired ending allowance are known, bad debt expense may be the plug.
Percentage-of-sales approach
A percentage-of-sales approach focuses more directly on estimating current-period bad debt expense. Do not confuse an expense estimate with an ending allowance estimate.
The takeaway
Allowance is a balance-sheet account. Bad debt expense is the period's income-statement estimate.
Related Summit guides
FAQ
Does writing off an account create bad debt expense?
Not under the allowance method when the expense was already estimated.
Does a write-off reduce net accounts receivable?
Generally no, because gross receivables and the allowance decrease together.
Does aging estimate expense or ending allowance?
An aging analysis generally focuses on the desired ending allowance balance.