Accounting
ERP
Financial Management
Allowance for Doubtful Accounts: Methods and How to Automate the Estimate
Last updated: October 8, 2026 · Independent guide · We do not sell rankings or coverage.
The allowance for doubtful accounts is a contra-asset account that reduces gross accounts receivable to the amount you expect to collect. You estimate it each period, usually with an aging schedule or a percentage of credit sales, and post the change as an adjusting entry to bad debt (credit loss) expense. Under US GAAP, trade receivables now fall under the current expected credit loss model in ASC 326 (CECL), so the estimate has to reflect expected losses on the whole balance, including invoices that are not yet due.
The rule and the journal entries
At each reporting date you calculate the allowance the receivables require, compare it with the balance already in the account, and book the difference:
Adjustment = required allowance − unadjusted allowance balance, where the unadjusted balance is the opening allowance, minus write-offs, plus recoveries since the last adjustment.
A positive result adds to the allowance and expense; a negative result releases part of it.
| Account | Debit | Credit | Note |
|---|---|---|---|
| 1. Increase the allowance Bad debt (credit loss) expense Allowance for doubtful accounts |
Adjustment amount |
Adjustment amount |
Period-end true-up when the required allowance exceeds the unadjusted balance. |
| 2. Release the allowance Allowance for doubtful accounts Bad debt (credit loss) expense |
Release amount |
Release amount |
When collections improve and the required allowance falls. |
| 3. Write off an invoice Allowance for doubtful accounts Accounts receivable (customer) |
Invoice balance |
Invoice balance |
No expense at write-off; the expense was recognized when the allowance was built. |
| 4a. Recovery: reinstate Accounts receivable (customer) Allowance for doubtful accounts |
Amount recovered |
Amount recovered |
Restores the customer history so the payment can be applied. |
| 4b. Recovery: collect Cash Accounts receivable (customer) |
Amount recovered |
Amount recovered |
Records the cash receipt against the reinstated balance. |
The direct write-off method, which books expense only when an invoice is abandoned, is not GAAP for material receivables; NetSuite’s documentation labels it “Non-GAAP” and the allowance method “GAAP” (Oracle NetSuite Help, September 22, 2026).
The two estimation methods
Aging method (balance sheet approach). You group open invoices by days past due, apply a loss rate to each bucket and add the results. The total is the required ending allowance. It fits CECL, which measures expected losses on the assets you hold at the reporting date.
Percentage of credit sales (income statement approach). You multiply the period’s credit sales by a historical loss rate and book that amount as expense. It is quick, but it produces an expense number, not a balance. In our reading of CECL, you still check the resulting allowance against expected losses on the receivables outstanding and true up the difference.
Many mid-sized companies combine a specific reserve for distressed customers, pooled aging rates for everything else and a documented adjustment for current conditions.
Worked example: quarter-end allowance under CECL
Illustration. A distributor closes its quarter on September 30. The loss rates below are the historical rates FASB uses in its trade receivables example (ASC 326-20-55-37 through 55-40), as reproduced in Deloitte’s CECL Roadmap, section 5.2 (no date shown). The balances, the forecast adjustment and the customer details are invented for this illustration.
Step 1: Reconcile the aging to the general ledger. The AR aging totals $3,410,000 and agrees to the receivables control account. If they differ, fix that first; our AR aging report template covers the common causes, such as unapplied cash and journal entries posted directly to AR.
Step 2: Pull out individually assessed accounts. One customer owing $25,000, all over 90 days, has filed for bankruptcy. The controller reserves it at 100% and removes it from the pool, which leaves $35,000 in the over-90 bucket.
Step 3: Adjust historical rates for current conditions. Slower payment in its largest customer segment leads management to expect losses about 10% above history, so it multiplies each rate by 1.10 and documents why.
| Bucket | Balance | Rate (history × 1.10) | Required allowance |
|---|---|---|---|
| Current (not yet due) | $2,400,000 | 0.3% × 1.10 = 0.33% | $7,920 |
| 1-30 days past due | $650,000 | 8% × 1.10 = 8.8% | $57,200 |
| 31-60 days past due | $210,000 | 26% × 1.10 = 28.6% | $60,060 |
| 61-90 days past due | $90,000 | 58% × 1.10 = 63.8% | $57,420 |
| Over 90 days (pooled) | $35,000 | 82% × 1.10 = 90.2% | $31,570 |
| Bankrupt customer (specific) | $25,000 | 100% | $25,000 |
| Total | $3,410,000 | 7.0% of gross AR | $239,170 |
Step 4: Roll forward the existing allowance. The allowance opened the quarter at $205,000. The team wrote off $38,000 and recovered $3,000 written off last year, so the unadjusted balance is $205,000 − $38,000 + $3,000 = $170,000.
Step 5: Book the true-up. The required allowance is $239,170, so the adjustment is $239,170 − $170,000 = $69,170.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Allowance for doubtful accounts | $38,000 | Write-offs during the quarter (summarized) | |
| Accounts receivable | $38,000 | Posted by customer and invoice | |
| Accounts receivable | $3,000 | Reinstate recovered balance | |
| Allowance for doubtful accounts | $3,000 | ||
| Cash | $3,000 | Payment received | |
| Accounts receivable | $3,000 | ||
| Bad debt (credit loss) expense | $69,170 | September 30 true-up | |
| Allowance for doubtful accounts | $69,170 | Ending balance $239,170 |
Step 6: Compare with a sales-based check. Credit sales for the quarter were $7,800,000. A 0.8% percentage-of-sales provision would have produced $62,400 of expense and an ending allowance of $232,400. The balance-sheet estimate governs, so the company books $69,170. Net receivables on the balance sheet are $3,410,000 − $239,170 = $3,170,830.
The standard behind it: ASC 326 and ASU 2025-05
ASC 326 replaced the “probable incurred loss” model. “Under CECL, an entity no longer waits for the occurrence of a triggering event,” and the estimate must consider “reasonable and supportable forecasts about future conditions” (Crowe, December 22, 2023). The standard became effective for private companies in fiscal years beginning after December 15, 2022, so calendar-year private companies have applied it since 2023 (AICPA & CIMA, December 14, 2023).
Deloitte’s roadmap stresses that you must consider losses on “current” receivables, assess whether historical loss rates differ from what you now expect, and pool only receivables with similar risk characteristics, which may mean separate aging matrices by customer group (Deloitte, no date shown).
On write-offs, ASC 326-20-35-8 says they “shall be deducted from the allowance” and “recorded in the period in which the financial asset(s) are deemed uncollectible.” Under ASC 326-20-30-1, expected recoveries belong in the allowance and cannot exceed amounts previously written off and expected to be written off (Deloitte Roadmap section 4.5, no date shown).
ASU 2025-05 simplifies the estimate for current accounts receivable and current contract assets arising under ASC 606. All entities may elect a practical expedient to assume that conditions at the balance sheet date do not change over the remaining life of those assets. Entities other than public business entities that elect it may also make a policy election to consider cash collected after the balance sheet date (KPMG, July 31, 2025). RSM notes that the expedient removes the requirement to incorporate macroeconomic forecasts for assets in its scope (RSM US, August 18, 2025). You must still adjust history for current conditions, and under the collections election, collected balances carry a zero allowance (Grant Thornton, August 14, 2025). The ASU is effective for annual periods beginning after December 15, 2025, applied prospectively, with early adoption permitted (Deloitte, July 30, 2025). Agree the elections with your auditor before you rely on them.
Tax treatment is different. IRS Publication 334 says a business “generally” must use the specific charge-off method, deducting specific debts as they become partly or totally worthless, with a narrow nonaccrual-experience exception for certain service receivables (IRS, page last reviewed April 30, 2026). The book allowance is not deductible when you build it, so it creates a temporary difference in your tax provision.
Common mistakes
- Booking the calculated reserve instead of the difference. Posting the full $239,170 in the example, rather than the $69,170 true-up, would overstate expense by $170,000.
- Reserving only the over-90 bucket. CECL expects an estimate across the whole portfolio, including invoices that are not yet due.
- Using stale loss rates. Recalculate history at least annually and document the evidence behind each adjustment.
- Double counting specific reserves. If you reserve a customer individually, take its balance out of the pooled buckets.
- Running write-offs through expense. Under the allowance method a write-off debits the allowance; debiting expense counts the loss twice.
- Letting the allowance reduce customer balances in subledgers. In NetSuite, an allowance line posted to an Accounts Receivable account and linked to a customer reduces that customer’s balance. Upflow’s NetSuite documentation suggests a non-AR account type, no customer link, or a placeholder customer (Upflow Docs, no date shown; Upflow sells AR software).
How to report it
Present receivables net of the allowance on the balance sheet, or show gross receivables with the allowance as a deduction, as in NetSuite’s example of $100,000 gross, $5,000 allowance and $95,000 net (Oracle NetSuite Help, September 22, 2026).
In the notes, CECL requires disclosure of your estimation methodology, relevant risk factors and changes in significant inputs, plus a quantitative rollforward of the allowance. Credit quality indicators are not required for trade receivables due in one year or less (Crowe, December 22, 2023). Build the Step 4 rollforward into the monthly close rather than reconstructing it at year end.
How ERP and accounting systems automate it
Most ERPs automate the write-off and the reporting but leave the estimate to you. Automation usually means a saved aging report feeding a reserve calculation and a generated true-up entry. Collections platforms improve the inputs, as our overview of AI accounts receivable software explains, and our guide to ERP software for midsize companies covers wider system selection.
Oracle NetSuite. NetSuite documents the allowance method and write-offs through Transactions > Financial > Make Journal Entries, followed by a zero-amount customer payment to clear the invoice from open invoices and aging reports (Oracle NetSuite Help, September 22, 2026). The help pages we reviewed describe no automatic reserve calculation, so teams usually calculate it from the A/R aging report and post the true-up manually.
Microsoft Dynamics 365 Business Central. Recurring general journals support Fixed, Variable and reversing methods with a date formula such as 1D+1M-1D to post on the last day of each month (Microsoft Learn, April 7, 2026). A Variable line keeps its accounts after posting but clears the amount, so you enter the new true-up each month. For calculation, SMART business offers SMART Reserves on AppSource to calculate a provision from coefficients by overdue period and customer risk group and generate the accounting entries (SMART business, no date shown; the vendor sells the add-on). Pricing is not published.
Odoo. A third-party module from Pokutsoft, listed at $48.20 on the Odoo Apps Store, adds aging or pooled loss-rate policies with a forward-looking factor, reserve runs that post only the difference, and a rollforward that ties to the ledger (Odoo Apps Store, last updated July 5, 2026). It is a small partner module, so test it and confirm support terms before an audit relies on it.
How we researched this
We read ASC 326 and ASU 2025-05 commentary from Deloitte, KPMG, Grant Thornton, RSM, Crowe and the AICPA, IRS Publication 334, vendor documentation for NetSuite, Business Central, Odoo and Upflow, and the top-ranking explainers, which mostly omit CECL and system support. We checked each source between October 6 and October 8, 2026. No vendor paid for inclusion.
Related guides
- Credit Memo: Definition, Example and Journal Entry
- Adjusting Journal Entries: 5 Types, Examples, Automation
Frequently asked questions
Is the allowance for doubtful accounts the same as the allowance for credit losses?
For trade receivables they describe the same contra-asset account. “Allowance for credit losses” is the ASC 326 term; the mechanics and journal entries are the same.
Do I need an allowance on invoices that are not yet due?
Usually yes. CECL requires you to consider expected losses on current receivables, and FASB’s own trade receivables example applies a 0.3% loss rate to the current bucket. Document how you estimated it, even when the amount is small.
Can a private company still use the percentage-of-sales method?
You can use it to estimate the period’s expense, but the resulting allowance should still reflect expected losses on receivables outstanding at the balance sheet date. Run an aging or loss-rate check at each reporting date and true up the difference.
Can I deduct the allowance for doubtful accounts on my tax return?
Generally no. IRS Publication 334 requires most businesses to use the specific charge-off method, so you deduct a debt when it becomes partly or totally worthless and you charge it off. The book allowance creates a temporary difference in your tax provision.
What does ASU 2025-05 change for my receivables?
It lets you assume balance-sheet-date conditions continue over the life of current receivables, so you do not need macroeconomic forecasts for them. Private companies electing the expedient may also consider cash collected after period end. It is effective for annual periods beginning after December 15, 2025, with early adoption permitted.
Sources
- Deloitte DART, Credit Losses (CECL) Roadmap, section 5.2 Trade Receivables and Contract Assets, no date shown. dart.deloitte.com
- Deloitte DART, Credit Losses (CECL) Roadmap, section 4.5 Write-Offs and Recoveries, no date shown. dart.deloitte.com
- Deloitte DART, “FASB Amends Guidance on the Measurement of Credit Losses for Accounts Receivable and Contract Assets,” July 30, 2025. dart.deloitte.com
- KPMG, “FASB issues ASU on simplified credit loss guidance,” July 31, 2025. kpmg.com
- Grant Thornton, “Measuring credit losses,” August 14, 2025. grantthornton.com
- RSM US, “Amended guidance for measuring credit losses on short-term receivables,” August 18, 2025. rsmus.com
- Crowe, “CECL standard considerations for nonbanking companies,” December 22, 2023. crowe.com
- AICPA & CIMA, “ASC 326 CECL trade receivables disclosures checklist and illustrations,” December 14, 2023. aicpa-cima.com
- IRS, Publication 334, Tax Guide for Small Business, page last reviewed April 30, 2026. irs.gov
- Oracle NetSuite Help, Allowance for Bad Debts, September 22, 2026. docs.oracle.com
- Oracle NetSuite Help, Creating a Journal Entry to Write Off Bad Debt, September 22, 2026. docs.oracle.com
- Microsoft Learn, Work with general journals (recurring journals), last updated April 7, 2026. learn.microsoft.com
- SMART business, “The Release of the SMART Reserves Solution” (vendor sells the product), no date shown, checked October 8, 2026. bc.smart-it.com
- Odoo Apps Store, US Allowance Doubtful module by Pokutsoft (vendor sells the product), last updated July 5, 2026. apps.odoo.com
- Upflow Docs, NetSuite allowance for bad debt (vendor sells AR software), no date shown. docs.upflow.io
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
