what is an allowance for doubtful accounts 
an allowance for doubtful accounts is a contra account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid the allowance for doubtful accounts estimates the percentage of accounts receivable that are expected to be uncollectible however the actual payment behavior of customers may differ substantially from the estimate investopedia candra huffunderstanding the allowance for doubtful accountsregardless of company policies and procedures for credit collections the risk of the failure to receive payment is always present in a transaction utilizing credit thus a company is required to realize this risk through the establishment of the allowance for doubtful accounts and offsetting bad debt expense in accordance with the matching principle of accounting this ensures that expenses related to the sale are recorded in the same accounting period as the revenue is earned the allowance for doubtful accounts also helps companies more accurately estimate the actual value of their account receivables because the allowance for doubtful accounts is established in the same accounting period as the original sale an entity does not know for certain which exact receivables will be paid and which will default therefore generally accepted accounting principles gaap dictate that the allowance must be established in the same accounting period as the sale but can be based on an anticipated or estimated figure the allowance can accumulate across accounting periods and may be adjusted based on the balance in the account companies technically don t need to have an allowance for doubtful account if it does not issue credit sales requires collateral or only uses the highest credit customers the company may not need to estimate uncollectability 