Allowance for Doubtful Accounts
Definition
A reserve that reduces accounts receivable by the amount you expect will never be collected. It records the likely bad-debt cost before a customer actually defaults.
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Formula
Allowance = Receivables × Expected Uncollectible %This mostly matters once you sell wholesale on terms. It keeps your balance sheet from overstating what customers really owe and keeps a single bad customer from wrecking one month's P&L.
Review it against your AR aging each quarter: older invoices deserve a bigger reserve. Watch for: receivables more than 90 days old with no reserve against them, which inflates both assets and profit.
Example
You have $120,000 of wholesale receivables and history says about 2% go uncollected, so you carry a $2,400 allowance.