What it means
Some customers won't pay. ASC 326 says you estimate how much of your receivables you won't collect and record that loss now, before any particular customer defaults. The estimate sits in an account called the allowance for credit losses, which older books call the allowance for doubtful accounts.
The model is called CECL, short for current expected credit losses. It's the accounting version of a landlord who budgets for a small share of tenants not paying in full.
The allowance sits directly under receivables on the balance sheet and reduces them to what you expect to collect. Building it up is an expense. Most startups group receivables by age, apply loss rates from their own history, and adjust for current conditions and reasonable forecasts.
When an invoice is finally hopeless, it's written off against the allowance, and that write-off doesn't hit the P&L again. Under ASU 2025-05, effective for annual periods beginning after December 15, 2025, any company can elect to assume conditions at the balance sheet date stay the same for the remaining life of current receivables and contract assets, and private companies can also elect to count cash collected after the balance sheet date.
Acme has $200,000 of open receivables at quarter end. Applying its loss rates by aging bucket, it expects $6,000 won't be collected. The allowance already holds $2,000, so Acme books $4,000 of credit loss expense. The balance sheet shows $200,000 of receivables less a $6,000 allowance, $194,000 net. If a $1,500 invoice is written off next month, receivables and the allowance each fall by $1,500 and no new expense appears.
ASC 606 decides when revenue and the receivable are recorded. This standard decides how much of that receivable is likely to turn into cash.
Why it matters. It keeps receivables at what you'll actually collect. Without it, bad debt hits all at once when you finally give up on an invoice, often months after the sale.
Try it with your numbers
Change any number. The working below updates as you type.
Required allowance = Σ (Receivables in bucket × Loss rate) · Expense = Required − Current allowanceRequired allowance
$6,000.00
How it’s worked out
- 1Open receivables$150,000.00 + $30,000.00 + $10,000.00 + $5,000.00 + $5,000.00$200,000.00
- 2Required allowance$150,000.00 × 1% + $30,000.00 × 3% + $10,000.00 × 6% + $5,000.00 × 20% + $5,000.00 × 40%$6,000.00
- 3Credit loss expense to book$6,000.00 − $2,000.00$4,000.00
- 4Net receivables$200,000.00 − $6,000.00$194,000.00
| Aging bucket | Balance | Loss rate | Expected loss |
|---|---|---|---|
| Current | $150,000.00 | 1% | $1,500.00 |
| 1–30 days past due | $30,000.00 | 3% | $900.00 |
| 31–60 days past due | $10,000.00 | 6% | $600.00 |
| 61–90 days past due | $5,000.00 | 20% | $1,000.00 |
| Over 90 days past due | $5,000.00 | 40% | $2,000.00 |
| Total | $200,000.00 | $6,000.00 |
Loss rates come from your own history, adjusted for current conditions and forecasts. Writing off an invoice later uses the allowance and doesn't hit the P&L again.
The entry, worked
Acme has $200,000 of open receivables. Applying its loss rates by aging bucket, it expects $6,000 won't be collected. The allowance currently stands at $2,000.
| Account | Debit | Credit |
|---|---|---|
| Credit loss expense | $4,000.00 | |
| Allowance for credit losses | $4,000.00 | |
| Total | $4,000.00 | $4,000.00 |
The allowance rises to $6,000, so net receivables show the $194,000 Acme expects to collect.
Common questions
Does CECL apply to a startup, or only to banks?
It applies to any company reporting under GAAP that holds financial assets like trade receivables. For most startups that means a simple, documented estimate on receivables.
What's the entry when I finally give up on an invoice?
Debit the allowance and credit accounts receivable. The expense was already recognized when the allowance was built.
Is there a simpler approach for private companies?
ASU 2025-05 lets any company elect to assume conditions at the balance sheet date stay the same for the remaining life of current receivables and contract assets from ASC 606 contracts. Private companies can also elect to consider cash collected after the balance sheet date, and must disclose the date they looked through. It applies to annual periods beginning after December 15, 2025, so 2026 for a calendar-year company, and can be adopted early.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Write-offRemoving an uncollectible receivable against the allowance for credit losses — under the allowance method it has no P&L effect; the expense was taken in the provisionGlossary
- AR aging and collections: a practical guide for startupsHow to read an AR aging, work out DSO, run a dunning cadence, record a promise to pay, escalate a late account and clear unapplied cash.Guide · 6 min
- Bad debt and write-offs: allowance vs direct methodHow to book a customer who won’t pay: the GAAP allowance under ASC 326, the direct write-off the IRS requires, and what to do if the money comes back.Guide · 7 min
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.