How to Calculate an Allowance for Bad Debt Based Off of AR Aging

by Jeff Franco J.D./M.A./M.B.A. ; Updated April 19, 2017

Pursuant to Generally Accepted Accounting Principles (GAAP), companies can estimate their bad debt expense using the allowance method. A common way of applying the allowance method is to estimate the bad debt expense is to analyze an aging Accounts Receivable (AR) report. An aging AR report provides accountants with a comprehensive view of the outstanding receivable balances and the number days they are past due.

Step 1

Estimate the percent of the AR balance that is uncollectible. To estimate the percent of your company’s current AR balance that is uncollectible, you must analyze the aging AR report. For example, if the AR balance is $1 million, of which $20,000 is more than four months past due, it’s reasonable to estimate that 2 percent of the AR balance will never be collected.

Step 2

Create the journal entry for your bad debt estimate. Your journal entry must increase the allowance for doubtful accounts, which is a contra-asset account to AR on the balance sheet, and the bad debt expense account, which reduces the company’s net income on the profit and loss statement. Prepare a credit entry to the allowance account to increase the balance and a debit entry to the bad debt expense account.

Step 3

Reduce the AR balance when debts become worthless. A journal entry is necessary to reduce the balance of the AR account once the company decides to permanently write off an invoice. For example, after eight months of unsuccessful attempts to collect on a $10,000 invoice, the company may decide that it’s time to just write it off. You do this by recording a credit entry to the AR account for $10,000, and a corresponding debit entry to the allowance account.

Step 4

Increase the AR balance for future collections. If the company eventually recovers all, or part, of the $10,000 invoice, you must make a debit entry to AR for the amount the company collects. You must also make a credit entry of the same amount to the allowance account. The balance in the allowance account reflects the amount of bad debts the company estimates it will write off before the end of the fiscal year. And since the customer ultimately pays the invoice, it’s unnecessary to use up the balance of the allowance account for the invoice.


  • Companies often report a net accounts receivable balance that reports the balance of the AR account, minus the balance of the allowance for doubtful accounts account.


  • Accountants use allowance for doubtful accounts to record estimates only. However, you never make an entry to the AR account until the company makes a final determination that a specific debt is uncollectible.

Items you will need

  • AR aging report
  • Trial balance that includes AR account


About the Author

Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.

Cite this Article | A tool to create a citation to reference this article Cite this Article

Related pages

treasury bond vs treasury noteexample of diminishing marginal producthow to repair atm machinedangers of reckless drivingirs lottery winningscar keys stolen from house insurance3in1 credit report with fico scorepaying off a repossessed carid bracelets for seniorsveracity medical definitioncalculate total contribution margincredit card advantages and disadvantagescredit needed for walmart credit cardtaxes in lottery winningspos vs ppo health insurancesample scholarship essays based financial needvandalism insurance coveragewawa employee stock ownership planhow to evict a tenant in illinoiskmart application statusirrevocable grantor trustcar excise tax deductiondoes medicaid cover tubal reversalein federal tax id samerestricted stock cost basisuop login pagesolvency vs liquiditycch prosystemflorida medicaid for providersoasdi withholding limitwhat is the difference between direct deposit and wire transfernys lpn license verificationcredit card stealing deviceamerican express serve withdraw moneydonate stuffed animals policeaarp part d drug planshow to trace a money order from western unionintrinsic value of bond formulainheritance tax oklahomatrs illinois retirement calculatorunderstanding the w4is money from parents taxablelost wells fargo debit cardlost savings bond formhow to get cash off ebt cardwhat is the difference between atm and debit cardhow to find out your routing number wells fargooklahoma teachers retirement systemprocess of eviction in texashow to hack someones credit cardnotary in floridarmd calculation formulapermanent home swapclaiming zero on w4bifurcated mortgagewells fargo lost debit card callroth ira vs regular investment account1098 t how much money backgeorgia deeds real estateliberal arts college in north carolinawhat does pay stubs meancalculate gross pay from net1040 k 1 instructionsinitial margin formulaquit claim deed form orange county floridahow to get rich quick legallymn m1 instructionsshort sale hardship lettergold gym cancellationstraight bond value calculatorcalculate total stockholders equitywhat to put on w4 formwhere can i cash a cashier's checkcommute from new jersey to nycfico vs experianiowa tax refund statusarizona renter rightstrack & trace post office