Estimating Allowance for Doubtful Accounts Receivable
If your business sells on credit terms to customers then there will be amounts owing to your business represented by accounts receivable in the balance sheet.
Normally customers will pay, however no matter how careful you are with credit checks, there will always be occasions where the customer will fail to pay and the accounts receivable will not be collectible.
In order to allow for this happening, an allowance for doubtful accounts receivable journal entry is made in the accounting records. The allowance for doubtful accounts receivable will either be based on a percentage of the credit sales of the business based on past experience (income statement approach), or it can be estimated by aging the accounts receivable and estimating which amounts are unlikely to be recovered (balance sheet approach).
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