An allowance for doubtful accounts reduces reported receivables by the portion expected not to be collected.
Why it exists
Money owed is reported as an asset. Some of it will never arrive.
Without an allowance, the balance sheet claims the business will receive every invoice it has issued, which is never true once a business has been trading for a while.
How the estimate is made
Usually from the business's own history: the share of invoices at each age band that historically went uncollected, applied to the current book — see accounts receivable aging.
Older balances carry a higher expected loss, because recovery rates fall sharply with age.
The difference from a write-off
An allowance is an estimate across the whole book, made in advance. A write-off removes one specific invoice once recovery is genuinely unrealistic — see bad debt.
Both recognise the same reality at different points. The allowance records that some of this will not be paid; the write-off records which.
Why a small business frequently has neither
Many owner-operated businesses recognise a loss only when they finally give up chasing, which can be a year or more after the work.
The effect is that profit looks better than it was in the period the work was done, and worse in the period the loss is finally recorded. Neither period is described accurately.
The figure that matters more
Whatever the accounting, the operational number is what proportion of billed work actually converts to cash — see collectible receivables and reducing bad debt.