Last reviewed 13 August 2026
Work out your allowance for doubtful accounts three ways, see the bad debt expense the period end adjustment actually needs, and get the journal entry with the debit and credit lines filled in.
Bad debt expense is the charge that brings your allowance for doubtful accounts up to the balance your receivables actually justify. Under the aging method you size the allowance bucket by bucket, then post the difference against what you already carry.
Example: buckets of $180,000, $60,000, $28,000, $14,000 and $9,000 at 0.5, 2, 8, 25 and 55 percent require an allowance of $12,790. You already carry $8,000, so bad debt expense is $4,790: debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
Three accepted ways to size the allowance. Every loss rate below is an assumption you set, not a published standard.
Enter the balance in each aging bucket and the share of it you expect to lose. The rates prefilled here are a common starting shape, not a standard: replace them with your own write-off experience.
Enter balances of zero or above, and loss rates between 0 and 100.
Rename any bucket, add your own, or remove one you do not use. Presets are orientation only: they change the loss rate assumptions, never your balances.
An income statement approach. The figure it produces is the expense itself, and it adds to your allowance rather than replacing it.
Enter credit sales above zero.
Enter a rate between 0 and 100.
Derive the rate from what you actually wrote off, then apply it to today's book. Years are weighted by size, so a large year counts for more than a small one.
Enter receivables above zero.
| Year | Receivables | Actual write-offs | Write-off rate |
|---|---|---|---|
| Average | -- | -- | -- |
Weighted write-off rate: 1.48%
The average row is the arithmetic mean of the years you entered. The weighted rate above divides total write-offs by total receivables, so a large year counts for more, and that is the rate applied to your current book.
The allowance balance cannot be negative.
Where the allowance comes from, bucket by bucket. The bar shows each bucket's share of the total allowance, which is rarely its share of the book.
| Bucket | Balance | Share of book | Loss rate | Estimated uncollectible | Share of allowance |
|---|---|---|---|---|---|
| Total | -- | 100% | -- | -- | 100% |
To record the period end adjustment to the allowance for doubtful accounts.
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | $4,790 | |
| Allowance for Doubtful Accounts | $4,790 |
Being the adjustment to the allowance for doubtful accounts.
Key takeaways
Bad debt expense this period
$4,790
Allowance is 4.4% of receivables. Elevated, and worth explaining in your notes.
Paidnice chases overdue invoices automatically in Xero and QuickBooks.
No card required.
Bad debt expense is the price you put on the part of your receivables book that is not going to turn into cash, recognized while the sales that created it are still in the same period.
Every business selling on credit loses some of it. The accounting question is not whether that happens, it is when you admit it. If you wait until an invoice is provably dead, the loss lands in a period that has nothing to do with the sale that caused it, and both periods are misstated.
The allowance method fixes the timing. You estimate the losses sitting inside today's receivables, charge that estimate to expense now, and hold it in a contra asset account called the allowance for doubtful accounts. Receivables stay at face value in the subledger, and the balance sheet reports what you actually expect to collect.
Three readers care about the number, for different reasons:
The quick version. Work out what the allowance should be, compare it with what the allowance already is, and post the difference. The difference is bad debt expense. The allowance is a balance, the expense is a movement, and confusing the two is the most common error on this whole topic.
Bad debt expense = Sum of (bucket balance x expected loss rate) - existing allowance
Under the aging method that is two steps: Required allowance = Sum of (bucket balance x expected loss rate), then Bad debt expense = Required allowance - existing allowance balance. Each has a standard way of going wrong.
Sort every open invoice by how far past its due date it is, not by how long ago it was issued. An invoice raised 45 days ago on net 60 terms is current, not overdue. Aging by invoice date instead of due date silently pushes healthy balances into risky buckets and inflates the allowance.
The rate is the share of that bucket you expect never to collect. Derive it from your own write-off history where you can. No standard publishes rates you can use, and any figure you take from an article, including the ones prefilled in the calculator above, is an assumption you are adopting rather than evidence.
Bucket balance times bucket rate, for every bucket, added together. That total is the balance the allowance account should carry at the reporting date. It is not the amount you post.
Compare the required allowance with the balance already in the account. Post the difference to bad debt expense. If the required allowance is lower than the balance you carry, the adjustment reverses: debit the allowance, credit bad debt expense.
A distribution business closes the quarter with $291,000 of receivables, split across five buckets, and already carries an $8,000 allowance.
Required allowance: 900 + 1,200 + 2,240 + 3,500 + 4,950 = $12,790. That is 4.4 percent of the gross book.
Bad debt expense: 12,790 minus the existing 8,000 = $4,790. Debit Bad Debt Expense $4,790, credit Allowance for Doubtful Accounts $4,790.
Net realizable value: 291,000 minus 12,790 = $278,210, which is the figure that belongs on the balance sheet.
Notice where the exposure sits. The $9,000 over 90 days is 3.1 percent of the book but 39 percent of the allowance. The oldest bucket is almost always where the provision comes from, which is why the cheapest way to reduce bad debt expense is to stop invoices getting there.
The headline expense figure moves with your estimate, so the more stable number to watch is the allowance as a share of gross receivables. Read it against your own history first, then against your sector.
Possibly light
Under 1 percent
Defensible with a clean aging and a strong write-off record. Hard to defend with a heavy 90 day bucket.
Typical
1 to 3 percent
Where most business to business books sit. Keep the working supporting it.
Elevated
3 to 6 percent
Normal in healthcare, construction and consumer credit. Elsewhere it needs a reason in the notes.
High
Over 6 percent
Either your credit policy is too loose or collections stopped happening. Both are fixable, and neither is an accounting problem.
Direction beats level. An allowance holding at 4 percent for three years with a stable aging is a considered estimate. The same 4 percent after a climb from 1.5 percent in twelve months is a business telling you something it has not said out loud yet.
Typical annual write-offs run from a few tenths of a percent of credit sales in manufacturing and software up to several percent in healthcare and consumer credit.
| Sector | Write-offs, % of credit sales | Allowance, % of AR | Why |
|---|---|---|---|
| Construction and trades | 0.7 to 2.0% | 3 to 7% | Retentions, disputes and subcontractor failures cluster in the old buckets |
| Manufacturing | 0.2 to 0.6% | 1 to 3% | Fewer, larger accounts. One failure moves the whole number |
| Wholesale and distribution | 0.3 to 0.9% | 1 to 4% | Trade credit is part of the offer, so exposure is spread wide |
| Professional services | 0.5 to 1.5% | 2 to 5% | Fee disputes age quietly and are rarely escalated early |
| Business services | 0.4 to 1.2% | 2 to 4% | Monthly billing, mostly net 30, moderate concentration |
| Software and SaaS | 0.2 to 0.8% | 1 to 3% | Card and direct debit clear most of the tail before it forms |
| Healthcare | 1.5 to 4.0% | 4 to 10% | Patient responsibility balances and payer denials both age badly |
| Retail with consumer credit | 1.5 to 4.0% | 3 to 8% | Many small balances, limited recovery economics per account |
Ranges compiled from published credit and working capital studies, reviewed August 2026. They are orientation, not sourced benchmark data, and they are not a target. Customer concentration moves this number further than sector does: one account at 20 percent of your book carries more risk than any industry average describes.
Do not adopt a rate because it appears in a table. An auditor will ask what supports your loss rates. "It is what the calculator suggested" is not an answer. Three to five years of your own write-offs against the receivables that produced them is, and it takes an afternoon to assemble.
All three are accepted practice. They differ in what they solve for, and that difference is the part most calculators get wrong.
| Method | Solves for | Best for | Weakness |
|---|---|---|---|
| Aging of receivables | The allowance balance | Period end adjustments and audit support | Needs a clean aging report and a rate per bucket |
| Percentage of sales | The expense directly | Monthly accruals, fast close | Drifts away from the real book, needs a periodic aging check |
| Historical write-offs | The rate itself | Setting the assumptions the other two methods use | Backward looking, blind to a change in customer mix |
Aging and historical experience are balance sheet approaches. They tell you what the allowance should be, and the expense is whatever movement gets you there. Percentage of sales is an income statement approach. It tells you the expense directly, and that amount is added to whatever the allowance already holds.
The difference is not academic. On the numbers above, $1,200,000 of credit sales at 1.2 percent gives a bad debt expense of $14,400 and an allowance that ends the period at $22,400. Subtracting the existing $8,000 first, which is what the live version of this page did to every method, would report an expense of $6,400 and understate the charge by $8,000. The calculator above switches behavior with the method, and labels which one it is doing.
In practice most finance teams run both: percentage of sales monthly because it is quick, then an aging based true up at quarter or year end. If the two are consistently far apart, the sales percentage is stale.
Three entries cover the whole lifecycle, and only the first one ever touches expense.
At period end, for the movement in the allowance:
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | $4,790 | |
| Allowance for Doubtful Accounts | $4,790 |
The debit hits the income statement. The credit increases a contra asset that nets against receivables. Gross receivables do not move, because no specific invoice has been given up on yet.
When a particular account is confirmed uncollectible:
| Account | Debit | Credit |
|---|---|---|
| Allowance for Doubtful Accounts | $3,200 | |
| Accounts Receivable | $3,200 |
No expense. That is the whole point of the allowance method: the cost was recognized when the estimate was raised. The write-off reduces both the gross receivable and the allowance, so net realizable value does not change at all. If a write-off changes your net receivables figure, something is wrong with the entry.
Reverse the write-off, then record the cash normally:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $3,200 | |
| Allowance for Doubtful Accounts | $3,200 | |
| Cash | $3,200 | |
| Accounts Receivable | $3,200 |
Reinstating the receivable first keeps the customer's payment history intact, which matters the next time somebody asks whether to extend them credit.
The direct write-off method skips the estimate. You wait until an invoice is known to be uncollectible, then charge it straight to expense: debit Bad Debt Expense, credit Accounts Receivable.
It is simpler, and for financial reporting under US GAAP it is not acceptable except where the amounts are immaterial, because it breaks the matching principle. The sale lands in one period and its cost lands in another, often a year later.
| Allowance method | Direct write-off | |
|---|---|---|
| Timing | Same period as the sale | When the account is confirmed dead |
| Basis | An estimate across the book | A specific identified invoice |
| Balance sheet | Receivables shown net of the allowance | Receivables shown at face value until write-off |
| Financial reporting | Required under US GAAP | Only where amounts are immaterial |
| US federal tax | Estimates are generally not deductible | Generally the basis for the deduction |
That last row is why both exist in the same business. Financial statements run on the allowance method and the tax return generally runs on specific worthless debts, which is why a deferred tax difference appears here almost every year.
Sources: expected credit loss measurement under US GAAP is set out in the FASB Accounting Standards Codification, Topic 326, Financial Instruments, Credit Losses. The equivalent requirement under IFRS is the expected credit loss model in IFRS 9 Financial Instruments. For the US federal tax treatment of business bad debts see IRS Topic no. 453, Bad debt deduction. This page is general information, not accounting or tax advice: confirm treatment with your own accountant.
Net realizable value is what the receivables book is actually worth: Net realizable value = Gross accounts receivable - Allowance for doubtful accounts.
It is the figure that appears on the face of the balance sheet, and it is the figure a lender applies a borrowing base percentage to. On the worked example, $291,000 of gross receivables against a $12,790 allowance gives $278,210, an expected collection rate of 95.6 percent.
Watch what happens when the aging deteriorates without the allowance moving. Gross receivables can grow while net realizable value stagnates, which looks like growth in the subledger and feels like nothing in the bank account.
Before treating a rising charge as bad luck, check which of these is driving it. Two are credit decisions, one is a process failure, and only one is genuinely outside your control.
The cheapest provision is the invoice you collected on time. Paidnice chases overdue invoices automatically in Xero and QuickBooks.
See automated remindersThe allowance is a symptom. It falls when fewer invoices reach the buckets that carry the high loss rates, and that is a collections problem, not an accounting one.
Track the result where it shows: the share of your book sitting over 60 days. If that falls, the allowance follows it down at the next period end, without touching a single assumption.
Put your bucket balances in B2:B6 and your loss rates, as decimals, in C2:C6.
=SUMPRODUCT(B2:B6,C2:C6)=SUMPRODUCT(B2:B6,C2:C6)-E1=F1*F2=SUM(I2:I6)/SUM(H2:H6)=SUMPRODUCT(B2:B6,C2:C6)/SUM(B2:B6)=SUM(B2:B6)-SUMPRODUCT(B2:B6,C2:C6)Use SUMPRODUCT rather than a column of helper multiplications. It survives someone inserting a bucket, which a hardcoded chain of additions does not.
Keep the rates in cells, never in the formula. An auditor asking how you arrived at 8 percent for the 31 to 60 bucket needs to see a cell they can point at, with a note beside it. Rates buried inside a formula are the reason this schedule gets rebuilt from scratch every year.
Bad debt expense answers how much of the book is lost. The related metrics answer why it got there.
| Metric | Question it answers | Unit |
|---|---|---|
| Bad debt expense | How much of the book we do not expect to collect | Currency |
| AR aging | Which balances are late, and by how far | Buckets |
| DSO | How many days until we get paid | Days |
| Collection efficiency | How much of what was collectable we collected | Percent |
| AR turnover | How many times receivables convert per year | Ratio |
| DSO savings | What faster collection is worth in cash | Currency |
Read them in order. The aging feeds the allowance directly, since the buckets in this calculator are its output. Rising DSO with a stable aging shape means slower payment across the board. Rising DSO with a fattening 90 day bucket means specific accounts are failing, and that is the pattern that turns into bad debt expense two quarters later.
Estimate the receivables you do not expect to collect, then charge the movement in that estimate to expense. Under the aging method, required allowance = the sum of each aging bucket balance multiplied by its expected loss rate, and bad debt expense = required allowance minus the allowance you already carry. Under the percentage of sales method, bad debt expense = credit sales for the period multiplied by your historical loss rate.
Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for the amount of the adjustment. The debit reduces profit on the income statement and the credit increases a contra asset that sits against accounts receivable on the balance sheet. Writing off a specific invoice later is a separate entry: debit Allowance for Doubtful Accounts and credit Accounts Receivable, which never touches expense again.
Split your receivables into aging buckets, apply an expected loss rate to each bucket, then add the results. A book of 180,000 current at 0.5 percent, 60,000 at 2 percent, 28,000 at 8 percent, 14,000 at 25 percent and 9,000 at 55 percent gives a required allowance of 12,790. That total is the balance the allowance account should carry, not the amount you post.
The aging method groups every open invoice by how far past due it is, then applies a higher expected loss rate to each older bucket. It is a balance sheet approach: it tells you what the allowance balance should be, and the expense is whatever movement is needed to get there. It is the most defensible method for a period end adjustment because the estimate follows the actual age of the book.
The percentage of sales method charges bad debt expense as a fixed percentage of credit sales for the period. It is an income statement approach, so the calculated figure is the expense itself and it adds to the existing allowance rather than replacing it. It is quick and it matches expense to the sales that created the risk, but it can drift away from the real state of the receivables book.
The allowance method estimates losses in the same period as the sale and posts them to a contra asset account. The direct write-off method waits until a specific invoice is known to be uncollectible, then charges it straight to expense. Only the allowance method satisfies the matching principle, so US GAAP requires it for financial reporting. Direct write-off is generally the treatment used for a US federal tax deduction.
Net realizable value = gross accounts receivable minus the allowance for doubtful accounts. If you hold 291,000 of receivables and your allowance is 12,790, net realizable value is 278,210. That figure is what appears on the balance sheet, and it represents the cash you actually expect the book to produce rather than the face value of the invoices you issued.
Bad debt expense normally carries a debit balance, because expenses reduce equity and are recorded as debits. The matching credit goes to Allowance for Doubtful Accounts, which is a contra asset and therefore carries a credit balance. A credit balance in bad debt expense only appears when recoveries or a downward revision of the estimate exceed new charges in the same period.
A doubtful debt is a receivable you estimate may not be collected, based on age, payment behavior or customer circumstances. A bad debt is a specific receivable you have concluded is uncollectible and have written off. Doubtful debts sit in the allowance as an estimate across the whole book. Bad debts are identified account by account and removed from receivables entirely.
There is no published rate to copy. Most business to business books land somewhere between 1 and 5 percent of gross receivables, but the right figure is whatever your own aging profile and write-off history support. Derive it rather than pick it: run three to five years of actual write-offs against the receivables that produced them, and use that experience as the starting point.
In both systems you raise a credit note against the original invoice and code it to your bad debts account, which clears the receivable without deleting the sales history. If you carry an allowance, the accounting entry behind the write-off is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, so the expense was already recognized when the allowance was raised.
Paidnice is accounts receivable automation that enforces your payment terms, trusted by thousands of businesses on Xero and QuickBooks. Credit control and debtor management, run for you.
INV-434
Acme Inc Ltd