A contra asset account is created under the allowance method because of the inability to write down a specific customer's account at the time bad debts expense is recognized.

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Under the allowance method, bad debts expense is recognized and estimated based on the expected percentage of uncollectible accounts in the total accounts receivable balance. However, at the time of recognition, it may not be possible to identify which specific customer accounts will be uncollectible. Therefore, a contra asset account called the allowance for doubtful accounts is created to offset the accounts receivable balance and reflect the estimated amount of uncollectible accounts. This allows for the recognition of bad debts expense while still maintaining a more accurate accounts receivable balance.

A Contra Asset Account Is Created Under the Allowance Method