Allowance for doubtful debts
In one sentenceAn estimated amount deducted from the customers balance to reflect the part not expected to be collected; it is usually calculated with higher rates for older debts.
Simply put
Not all of the customers balance will turn into cash. So you estimate the expected loss and record it as an allowance, and accounts receivable appear in the statements at the amount you actually expect to collect.
The practical method: group debts by age and set a rate for each bracket that rises as the delay grows. Under international standards (IFRS 9) this is called expected credit losses.
Worked example
A plastics factory grouped its customers' debts by age and set assumed rates for illustration.
Up to 90 days: 200,000 × 1%2,000 SAR
91 to 180 days: 50,000 × 10%5,000 SAR
Over 180 days: 20,000 × 50%10,000 SAR
Required allowance: 2,000 + 5,000 + 10,00017,000 SAR
Don't confuse it with
Bad debtsA bad debt is a specific debt proven uncollectible, while the allowance is an estimate for a group of debts.