Under allowance method, the company should make necessary adjustments at the end of its accounting year for the amount of losses it predicts as a result of making sales on credit to its customers. This allowance method has three basic yet important features:
1. The uncollectible amounts are anticipated and the expense for the uncollectible account is matched
against sales in the same period in which sales were made.
2. Through an adjusting entry at the last of accounting year, forecasted uncollectible receivables are
credited to Allowance for Doubtful Debts Account and debited to Bad Debts Expense account.
3. Recognized uncollectible receivables are debited to Allowance for Doubtful Debts Account and credited to Account Receivable account at the time when specific amount is written.