Every Australian business that extends credit faces the uncomfortable truth: not all customers pay their bills. The allowance for doubtful accounts—sometimes called a bad debt provision—is a critical accounting tool that helps businesses realistically assess their receivables, comply with ATO requirements, and maintain healthy cash flow. But with 2025 bringing fresh economic headwinds and regulatory updates, it’s never been more important to get this right.

What is the Allowance for Doubtful Accounts?

The allowance for doubtful accounts is an estimate of the portion of your accounts receivable that you don’t expect to collect. Rather than waiting until debts are clearly uncollectible, businesses set aside a provision at the end of each period, matching potential losses to the sales that created them. This aligns with Australian Accounting Standards Board (AASB) 9 Financial Instruments, which requires an ‘expected credit loss’ model for recognising bad debts.

For example, if your business has $500,000 in receivables and you estimate 2% may go unpaid, you’d record an allowance of $10,000. This doesn’t mean you write off specific invoices—just that your balance sheet and profit & loss reflect the likely reality.

Why is this important? Overstating assets can mislead investors, impact credit ratings, and skew tax calculations.
Who is affected? Any business with trade receivables, from sole traders to listed companies.

2025 Policy Updates and Economic Backdrop

Several key changes and trends are shaping how Australian businesses approach doubtful accounts in 2025:

ATO Crackdown: The Australian Taxation Office has increased audits of bad debt claims, especially for SMEs. Documentation and realistic estimates are critical to avoid disputes.
Revised AASB 9 Guidance: Updates released in late 2024 clarify the ‘simplified approach’ for small businesses, emphasising historical loss rates adjusted for current conditions—like the rising insolvency rates seen in early 2025.
Economic Slowdown: With consumer spending tightening and business insolvencies up 12% year-on-year, the likelihood of non-payment is higher than pre-pandemic averages. Businesses are being urged to revisit their provisioning models and stress-test their assumptions.

Case in point: A Melbourne-based wholesaler, after updating their bad debt model to reflect 2025’s tougher environment, avoided a cash flow crunch by promptly adjusting credit terms for higher-risk clients.

How to Calculate and Manage Your Allowance in 2025

Getting your allowance for doubtful accounts right isn’t just about compliance—it’s about survival. Here’s how to stay ahead:

Review Historical Data: Analyse past write-offs and collection patterns. In 2025, consider sector-specific challenges—retail and construction are especially exposed to late payments.
Factor in Current Conditions: Adjust your estimates for known risks, such as economic downturns, supply chain disruptions, or industry-specific shocks.
Document Your Method: Whether you use a percentage of receivables, an aging analysis, or a more sophisticated model, keep clear records. The ATO and auditors want to see your reasoning.
Monitor and Adjust Regularly: Don’t set and forget. Review your allowance each quarter or month, especially if customer payment patterns change.

Example calculation for 2025:

Total receivables: $400,000
Expected loss rate (based on recent data and economic outlook): 3%
Allowance for doubtful accounts: $12,000

Best Practices for Australian Businesses

To minimise surprises and maximise compliance:

Segment customers by risk and apply tailored loss rates
Automate reminders and offer payment plans to improve collections
Use real-time credit checks for new customers
Consult with your accountant on AASB 9 updates and ATO requirements

Remember, a well-managed allowance helps you make smarter decisions, avoid overpaying tax, and safeguard your business against the inevitable ups and downs of the economy.