Allowance for doubtful accounts
Financial Accounting glossary · Assets: Cash, Receivables, Inventory, PP&E & Intangibles
Definition
Contra-asset reserve representing the estimated portion of accounts receivable that will not be collected.
Allowance for doubtful accounts in plain English
When a business sells on credit, some customers just never pay — that's reality. The allowance for doubtful accounts is the company's honest guess, set aside in advance, of how much of what it's owed will go bad. It's a "contra-asset," meaning it sits next to Accounts Receivable and subtracts from it, so the balance sheet shows the amount the company realistically expects to actually collect. Think of a lemonade stand that lets 10 friends pay later but knows from experience 1 usually flakes — you'd mentally count on 9, not 10.
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