An accounting allowance for bad debt is a provision created by a company to account for the potential losses that may arise from customers failing to pay their debts. It is a contra-asset account, meaning it is subtracted from the total accounts receivable balance to arrive at the net realizable value of the accounts receivable.
The allowance for bad debt is important because it allows companies to more accurately estimate their financial performance. By setting aside a provision for bad debts, companies can reduce the risk of overstating their assets and income. Additionally, the allowance for bad debt can help companies to improve their cash flow by reducing the amount of money that is tied up in uncollectible accounts receivable.