There are two methods for accounting for uncollectable accounts: the Direct Write-Off Method and the Allowance Method. This video will focus on the Allowance Method. The Allowance Method estimates Bad Debt Expenses by recording collection losses based on company’s collection experience or history. It also sets up an Allowance for Doubtful Accounts which is a contra-account to Accounts Receivable. It represents the amount of receivables not expected to be collected in cash. Under the Allowance Method, Bad Debt Expense is recorded at the end of the period as an adjusting entry. The adjusting entry is a debit to Bad Debt Expense and a credit to the Allowance for Doubtful Accounts. Here’s when expense gets recorded. There are three common methods that can be used to determine the amount of expense recorded in an adjusting entry. These methods – the Percent of Sales, Percent of Receivables, and Aging of Receivables – are covered in separate video podcasts and I encourage you to check them out. When we write off an account with the Allowance Method, the debit is to the Allowance for Doubtful Accounts and a credit to Accounts Receivable. Notice the debit is NOT to Bad Debt Expense. The expense was already recorded when we made the adjusting entry. Sometimes we collect an account that was previously written off. To do this, we need to first reverse the write off entry. So, we debit Accounts Receivable and credit the Allowance for Doubtful Accounts Then we can record the collection from a customer, which is a debit to Cash and a credit to Accounts Receivable. Finally, There are two acceptable ways of presenting Accounts Receivable on the Balance Sheet. The first is to display the Gross Accounts Receivable amount less the Allowance for Doubtful Accounts. This gives us Net Accounts Receivable. The other way is to report the amount of the Net Accounts Receivable amount, as you see here. Net Realizable Value is how Accounts Receivable is “valued” on the balance sheet. Net Accounts Receivable is the Net Realizable Value.