Under the allowance method, bad debt expense allowance does not change the balance in the Accounts Receivable account.
What is the allowance method?
Allowance method is the method that is used to refer to the setting aside of reserves for bad debts which may be expected in the near future.
The reserves are done based on the percentage of sales that were made in a given period.
The bad debt occurs when the amount of money that is due can no longer be collected because the loaner is not able to meet up with the debts that they have accrued.
An example is when shop is no longer able to pay their bills that they cannot even pay up for the goods that they have collected from a third party. The owner of the goods would then have no option than to write off the debt as a bad debt because there is no means of paying back.
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