A contra asset or an amount to be deducted from an asset account to reflect a particular situation or fact, such as uncollectiblity of accounts receivable, or the so-called allowance for doubtful accounts) (ADA), AFDA) and allowances for accumulated depreciation.

Such deductions reduce account balances to reflect the economic factors at play. Allowances may also involve other types of customer accounts. Examples include a sales allowance that constitutes an amount granted to a customer who had purchased merchandise with a pricing error or other problem not involving the return of goods.

The allowance represents a management’s estimate of the amount of accounts receivable that will not be settled by customers. If actual results differ, then management would reconsider its estimation methodology to re-align the allowance more with these results.