The allowance for doubtful accounts is used to reflect how much of the total Accounts Receivable is estimated to be uncollectible. To record estimated uncollectible accounts, the following adjusting entry is made.
The bad debt expense is shown on the income statement. Allowance for doubtful accounts appears on the balance sheet and is subtracted from accounts receivable resulting in the estimated net realizable accounts receivable.
Two different methods can be used to estimate uncollectible accounts. One method focuses on estimating Bad Debt Expense on the income statement, while the other focuses on estimating the desired balance in allowance for doubtful accounts on the balance sheet.
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