ADA stands for Allowance for Doubtful Accounts. It is a contra-asset account that estimates the portion of a company's accounts receivable it does not expect to collect. Sitting against receivables on the balance sheet, it reduces them to the amount the business realistically expects to receive, known as the net realisable value.
In accounting, the allowance exists because some customers will not pay. Rather than wait for a specific invoice to go bad, accrual accounting (under both GAAP and IFRS) requires you to estimate the loss in advance and match it to the same period as the sale. That estimate is the ADA, and the matching expense is bad debt expense.
It is a contra-asset.ADA is subtracted from gross receivables to show net realisable value on the balance sheet.
It pairs with bad debt expense.Creating or topping up the allowance records a matching bad debt expense in the income statement.
Two common methods.A flat percentage of receivables, or an aging schedule that weights older invoices more heavily.
The simplest method multiplies total receivables by an estimated uncollectible rate drawn from your history. The more accurate method ages your receivables and applies a higher rate to older buckets. Use the calculator to see the allowance, the net realisable value and the journal entry for any figures you enter.
Set the rate from your own write-off history, or weight it higher for older invoices using an aging schedule.
The example above assumes the allowance is being created from a zero balance. If an allowance already exists, you only record the difference needed to reach the new target (the adjusting entry), not the full amount. For the matching write-off mechanics, see bad debt expense, or run the numbers in the bad debt expense calculator.
The allowance for doubtful accounts is the balance-sheet estimate of uncollectible receivables; bad debt expense is the income-statement cost of creating or increasing that allowance. They are two sides of the same entry: you debit bad debt expense and credit the allowance.
| Aspect | Allowance for doubtful accounts | Bad debt expense |
|---|---|---|
| Where it sits | Balance sheet (contra-asset). | Income statement (expense). |
| What it represents | The estimate of receivables you will not collect. | The cost of creating or topping up that estimate. |
| Over time | A running balance that carries forward. | Resets to zero each period. |
| On a confirmed write-off | Reduced when the bad invoice is removed. | Not charged again; the loss was already expensed. |
A specific invoice that is confirmed uncollectible is then written off against the allowance, not expensed again. Related terms: doubtful account, uncollectible accounts and charge-off.
A good allowance starts with good data: an accurate aging of receivables and a reliable write-off history. Automating your accounts receivable reporting in Xero or QuickBooks keeps your aging current, which makes the estimate more defensible and helps you collect before an account ever becomes doubtful. The AR aging analysis tool is a quick way to see where the risk sits.
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