Bad debt is the amount which is not received against the accounts receivable for the goods sold or the services rendered.
As per the allowance method, the period in which the seller identifies the account receivable that can remain unpaid is not considered to be recognized as a bad debt expense, whereas the period in which the sales to the uncollectible accounts are made is considered for recognizing the bad debt expenses.
The estimated bad debt loss recognition entry is passed by deducting the bad debt expense and adding the allowance for doubtful accounts at the end of the accounting period at which the sales to the uncollectible accounts are made.
According to the allowance method, the period in which it is identified by the seller that the particular amount can remain unpaid is not considered to be recognized as a bad debt expense.
The allowance method estimates the uncollectible amounts and bad debts in advance. It records the bad debt expense on the income statement, which reduces the net income for the period.
The allowance method directs to record the bad debt expense in the period that witnesses the credit sales made by the business. The bad debt allowance is reported in accordance with the expense recognition principle, which mandates a company to record expenses in the period in which they are incurred, regardless of the period in which they are paid. So, the business cannot record the bad debts in the period wherein the customer is unable to pay off the outstanding amount.
The credit sales related to the uncollected amount and its bad debt expense are recorded in the same period in the books of accounts as per the allowance method to fulfill the requirement of the recognition principle.