Key takeaways
What this article covers, in order:
- Why receivables carry an allowance at all
- What CECL and IFRS 9 require
- Worked example: a provision matrix for an industrial supplier
- A tax difference to expect in the US
- Common mistakes with the allowance
- hellobooks-helps-you-estimate-and-track-it">How HelloBooks helps you estimate and track it
The allowance for doubtful accounts sits on the balance sheet directly under accounts receivable, as a contra-asset with a credit balance that reduces receivables to the amount you actually expect to collect. If customers owe you $650,000 and you expect $25,800 of that never to arrive, the balance sheet shows receivables of $650,000 less an allowance of $25,800, or $624,200 net. Under US GAAP the account is now usually called the allowance for credit losses, and under IFRS a loss allowance; both require the estimate to look forward, not just back.
Why receivables carry an allowance at all
When you sell on credit you record the revenue and the receivable immediately. Some of those customers will not pay, but on the day of sale you do not know which ones. The allowance method deals with that uncertainty: you estimate the expected shortfall across the whole book, recognise it as an expense in the same period, and reduce the receivable through a separate account. Individual invoices stay on the customer ledger at their full amount until you are sure a specific one is lost.
The alternative, the direct write-off method, waits until a specific debt is uncollectible and expenses it then. It overstates assets in the meantime and pushes losses into later periods, which is why US GAAP and IFRS do not accept it except where the amounts are immaterial.
What CECL and IFRS 9 require
US GAAP: CECL (ASC 326)
ASU 2016-13 replaced the old incurred-loss model with the current expected credit loss model. It applies to financial assets carried at amortised cost, and that includes ordinary trade receivables, not only bank loans. You record lifetime expected losses from the moment the receivable arises, using past experience, current conditions and reasonable and supportable forecasts.
- SEC filers other than smaller reporting companies applied it for fiscal years beginning after 15 December 2019.
- Everyone else, including private companies, applied it for fiscal years beginning after 15 December 2022.
- ASU 2025-05 added a practical expedient for current accounts receivable and current contract assets: you may assume that conditions at the balance sheet date do not change for the remaining life of the asset, which removes the need to build an economic forecast for short-dated receivables. Entities other than public business entities that use it may also elect to consider cash collected after the balance sheet date. It applies to annual periods beginning after 15 December 2025, with early adoption permitted.
IFRS 9: the simplified approach
IFRS 9 uses a general three-stage expected credit loss model, but for trade receivables and contract assets without a significant financing component it requires the simplified approach: the loss allowance is always measured at lifetime expected credit losses. There is no need to track whether credit risk has increased since the sale. The standard specifically mentions a provision matrix, loss rates applied to receivables grouped by how long they have been outstanding, as a practical way to do this.
In practice, a small or mid-sized business under either framework ends up in the same place: an aging-based calculation using its own loss history, adjusted for what it knows about the months ahead.
Worked example: a provision matrix for an industrial supplier
Cobalt Industrial Supply distributes fasteners and fittings to fabricators and contractors on 30-day terms. At year-end its aged receivables total $650,000. Its collections history over the past three years gives base loss rates for each age bucket. Because two of its larger contractor customers report slowing order books, the controller adds a forward-looking adjustment to each rate.
Step 1: apply loss rates to each age bucket
- Current (not yet due): $400,000 × 1% (base 0.8%) = $4,000
- 1–30 days past due: $150,000 × 3% (base 2.5%) = $4,500
- 31–60 days past due: $60,000 × 8% (base 7%) = $4,800
- 61–90 days past due: $25,000 × 20% (base 18%) = $5,000
- Over 90 days past due: $15,000 × 50% (base 45%) = $7,500
- Required allowance: $25,800
On base rates alone the figure would have been $22,400. The $3,400 difference is the forward-looking overlay, and it is exactly the judgement CECL and IFRS 9 ask you to make and document.
Step 2: work out what is already in the allowance
The allowance opened the year at $21,500. During the year two things went through it:
The write-off. Harlow Fabrication went into liquidation owing $6,400, so the debt was written off against the allowance:
- Dr Allowance for doubtful accounts $6,400
- Cr Accounts receivable — Harlow Fabrication $6,400
The recovery. A customer written off two years ago unexpectedly paid $1,200. The write-off was reinstated and the cash recorded:
- Dr Accounts receivable $1,200
- Cr Allowance for doubtful accounts $1,200
- Dr Cash $1,200
- Cr Accounts receivable $1,200
Notice that neither entry touches the income statement. The loss on Harlow was expensed earlier, when it was built into the allowance. The balance before year-end adjustment is $21,500 − $6,400 + $1,200 = $16,300.
Step 3: book the adjustment
The allowance needs to be $25,800 and currently holds $16,300, so the year-end top-up is $9,500:
- Dr Bad debt (credit loss) expense $9,500
- Cr Allowance for doubtful accounts $9,500
If the required balance had been lower than the existing one, you would reverse the excess, crediting the expense account.
Step 4: present it
- Accounts receivable — $650,000
- Less: allowance for doubtful accounts — ($25,800)
- Accounts receivable, net — $624,200
Many balance sheets show only the net figure with the allowance in brackets or in the notes, for example: accounts receivable, net of allowance of $25,800.
A tax difference to expect in the US
Your tax return does not follow the allowance. For US federal tax, a business bad debt is deductible only when a specific debt becomes wholly or partly worthless, not when you add to a general allowance, so Cobalt deducts the $6,400 Harlow write-off, not the $9,500 increase in its estimate. The gap between book expense and tax deduction is a temporary difference. The IRS also advises keeping records for seven years where you claim a bad debt deduction, longer than its usual three-year guidance.
Common mistakes with the allowance
- Writing off directly to expense. If you already have an allowance, a write-off should be charged against it; expensing it again double-counts the loss.
- Leaving the matrix unchanged for years. Loss rates should be refreshed from actual collection history, and the forward-looking adjustment revisited each period.
- Ignoring the current bucket. Under CECL and IFRS 9, invoices that are not yet due still carry an expected loss, however small.
- Mixing different customer types in one matrix. Government bodies, distributors and small contractors default at different rates; group them separately if your data supports it.
- Forgetting credit notes and disputes. An invoice that is unpaid because the customer disputes the goods is often a revenue or returns issue, not a credit loss.
- Not reinstating recoveries. Recording a recovered debt straight to income loses the history you need to measure your true loss rate.
hellobooks< / a > -helps-you-estimate-and-track-it">How HelloBooks helps you estimate and track it
The raw material for a provision matrix is a reliable aged receivables report, and that is where HelloBooks does most of the work. AR aging and customer statements with aging come straight from your invoices and payments, so the buckets in Step 1 are always current. Automated overdue-invoice reminders and payment links on invoices help keep balances out of the older buckets in the first place.
You keep the allowance and bad debt expense as their own accounts in the chart of accounts, post write-offs and the period-end adjustment as journal entries that go through approval, and use credit notes for genuine disputes so they do not distort your loss history. The audit trail shows who approved each write-off, and period locking keeps a closed year's estimate from being changed after the fact. The judgement on loss rates and forward-looking adjustments stays with you and your accountant.
This is general information as of November 2026, not tax, legal or accounting advice; check the official standard or a qualified CA/CPA for your situation.
