An allowance for doubtful accounts estimates the number of outstanding receivables a company does not expect to collect. Allowance for doubtful accounts is a contra-asset account listed as a negative or zero balance on a company's balance sheet. It can also be referred to as Allowance for Uncollectible Expense, Allowance for Bad Debts, Provision for Bad Debts or Bad Debt Reserve.
The AFDA recognizes and records expected losses from unpaid customer invoices or accounts receivable (A/R). Companies use the allowance method to estimate uncollectible accounts and adjust their financial statements to present an accurate picture of their financial position, specifically cash flow.