Under the allowance method, bad debt expense is recorded:

Under the allowance method, bad debt expense is recorded based on estimated uncollectible accounts receivable rather than actual write-offs. This method aligns with the matching principle in accounting, which states that expenses should be recognized in the same period as the revenues they help to generate.

1. Estimation Process: Companies typically use historical data, aging of accounts receivable, or other statistical methods to estimate the percentage of receivables that might become uncollectible.

2. Journal Entry: When bad debt expense is estimated, an adjusting journal entry is made. The entry typically debits Bad Debt Expense and credits Allowance for Doubtful Accounts. This creates a reserve for expected future write-offs without reducing accounts receivable directly.

3. Reassessment: At the end of each accounting period, companies assess the adequacy of the allowance established. Adjustments may be made to ensure that the allowance reflects the expected collections accurately.

By utilizing the allowance method, companies maintain a more accurate picture of their financial health and ensure that their balance sheets reflect realistic asset values. This approach helps to smooth out income over time, rather than facing sudden hits from bad debts as they occur.