Allowance for doubtful debts

Allowance for doubtful debts is a contra-asset estimate of the portion of trade receivables not expected to be collected, deducted from gross receivables to show their net realisable value on the balance sheet under the prudence concept.

ByHoang TruongUpdated June 30, 2026

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A firm holds €120,000 of trade receivables and estimates 3% will not be collected, so it records bad-debt expense of €3,600 and credits an allowance for doubtful debts of the same amount. Gross receivables of €120,000 split into net receivables of €116,400, the amount reasonably expected to be collected, and the €3,600 allowance.

Where it fits

SubjectFinancial AccountingAdvancedTopicWorking Capital & Trade AccountsAdvanced

The formula

LaTeX

\text{Net Trade Receivables} = \text{Gross Trade Receivables} - \text{Allowance for Doubtful Debts}

Variables

$N e tT r a d e R ece i v ab l es$: Amount expected to be collected — the figure reported on the balance sheet (€)
$G r oss T r a d e R ece i v ab l es$: Total outstanding customer balances before any impairment estimate (€)
$A l l o w an ce f or D o u b t f u l D e b t s$: Contra-asset estimate of the portion unlikely to be collected (€)

Carrying value of receivables on the balance sheet

Check yourself

PracticeCORE

At 31 December a firm has gross trade receivables of €50,000 and estimates that 3% is unlikely to be collected. No allowance existed at the start of the period. Which journal entry correctly establishes the allowance for doubtful debts?

Select an answer to check your understanding.