Allowance for Doubtful Accounts Definition

Short Definition
The allowance for doubtful accounts (ADA) is a budget line item. It represents the anticipated amount of accounts receivable that will never be collected.

Expanded Definition
Also known as bad debt reserve, allowance for doubtful accounts helps small business owners be realistic about their cash flow. When you extend credit to a customer, there is a chance that they will not pay you. For example, the customer may go out of business or refuse to pay based on a dispute. Doubtful accounts have not been written off yet, but there is reason to believe that payment may not come.

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