Allowance method definition including break down of areas in the definition. Analyzing the definition of key term often provides more insight about concepts. Allowance method can be defined as: Procedure that (a) estimates and matches bad debts expense with its sales for the period and/or (b) reports accounts receivable at estimated realizable value. The allowance method is the preferred method for GAAP because it complies with the accrual matching principle, the allowance method attempting to match bad debt expense with the revenue that caused the expense. The alternative to allowance method is the direct write off method, the direct writhe of method being easier but it does not match up revenue and expense the way the allowance method does. In order to allow for this matching the allowance require estimates, estimates of how much AR will not be collected, estimates of how much revenue, sold on account, is not collectible.
