Allowance for Credit Losses
Estimating Uncollectible Accounts
Under the allowance method, companies estimate future credit losses before specific accounts become uncollectible. This approach follows the matching principle by recognizing bad debt expense in the same period as the related revenue.
Tip
The aging method generally produces a more accurate estimate because it considers how long accounts have been outstanding.
Summary
The allowance method estimates expected credit losses before actual defaults occur.