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The allowance for doubtful debts, in depth

Bad debts and doubtful debts are tested as a pair almost every year — and the ADJUSTMENT to the allowance (not just its existence) is where the marks concentrate.

Adjusting the allowance up or down

  • The allowance for doubtful debts is an ESTIMATE, usually set as a percentage of the closing accounts receivable balance.
  • Each year, the allowance is adjusted to whatever the NEW estimate should be — the closing entry records only the CHANGE (the difference between the old and new allowance), not the whole new balance.
  • If the new estimate is HIGHER than the old allowance: Debit Doubtful Debts (an expense), Credit Allowance for Doubtful Debts, for the INCREASE only.
  • If the new estimate is LOWER than the old allowance: the entry reverses — Debit Allowance for Doubtful Debts, Credit Doubtful Debts (a decrease in the expense), for the DECREASE only.
Worked example Calculating the doubtful debts adjustment The allowance for doubtful debts currently stands at $340. Closing accounts receivable is $9,800, and the business estimates 5% will be uncollectable. Find the adjusting entry. New estimated allowance needed: 9,800 × 5% = $490. Compare to the existing allowance: $490 (new) vs $340 (old) — an INCREASE of
50. Journal entry: Debit Doubtful Debts 150, Credit Allowance for Doubtful Debts 150 — only the
50 CHANGE, not the full $490. ✓ The adjustment is always the DIFFERENCE between the old and new allowance, never the full new balance — recording $490 instead of
50 is the single most common error here. ✕

Doubtful debts is an ESTIMATE for the whole balance — bad debts is a SPECIFIC, known amount

A bad debt written off names a SPECIFIC debtor who is definitely not going to pay, and removes them from accounts receivable directly. The allowance for doubtful debts is a general ESTIMATE covering the whole remaining receivables balance, held in a separate contra account rather than removing any specific debtor. Confusing the two — writing off a doubtful-debts estimate as if it were a specific bad debt, or vice versa — uses the wrong account entirely. ℹ

The accounts receivable note ties the two together

The accounts receivable note reports the GROSS receivables balance, LESS the allowance for doubtful debts, EQUALS the net figure that appears in current assets. A specific bad debt write-off has already reduced the gross receivables balance directly (since that debtor is removed entirely), while the allowance sits alongside as a separate estimate for whatever remains uncollected but not yet specifically identified.

Practise just this