Disclaimer: Seek Accounting advice from a professional to understand if you need to record allowances for doubtful accounts.  Odoo does not provide Accounting advice.

In most organizations there is a small percentage of Customer Invoice balances that won't be paid (hopefully not more than a few percent of your total revenue) and you will ultimately have to charge them off as a cost of doing business. Normally this happens when your Customer goes out of business and can't pay you.

A "doubtful account" is one term used in Accounting to describe this balance that might not ever be paid.

Allowing for doubtful accounts might be necessary based on requirements to adhere to specific Accounting standards. If a loss is 'probable' and 'can be reasonably estimated' then you may have to report it.

Given the matching principle (expenses reported in the same period as revenues), if you need to record the allowance, you have to do it based on the revenue in the reporting period.

There are several methods you can use, but the two main ones are based on either the Income Statement approach or the Balance Sheet approach.  Hybrid approaches also exist that also include reviewing additional factors to come up with an amount.

Let's say your reporting period is annually and you have $25,000 of open Customer Invoices on your book at the end of a given year. 

For the Income Statement approach, you look at the revenue reported in the period and use a percentage to calculate the amount to record. The percentage should be based on your historic levels of unpaid invoices. If revenue was $250,000 and you think 2% won't be paid, then you would be allowing for $500.

For the Balance Sheet approach, you look at the total receivables reported in the period and apply a percentage to that balance based on how long the money has been due.  If $5,000 of the open Invoices have been unpaid for more than 120 days, you might use 25% of that balance and nothing for the rest.  In this case, you would be allowing for $1,250.

Either way, a manual Journal Entry is recorded that looks something like this (the amount would change based on which method you use).

Aged Receivables Report:

Balance Sheet (Assets portion):

Profit and Loss:

121500 is a receivable account

700500 is a regular expense account

The following reporting period, once you finally give up and have to write-off the balance, make an entry like this:

Then reconcile the Customer pieces and the Allowance pieces (to clear the Aged Receivable report):

Balance Sheet (Assets Portion):

Income Statement is not affected.

If you DO end up collecting the money, you would simply enter the payment as normal in the following period, then create a Journal Entry to reclass the allowance as an expense credit:

Then reconcile the two allowance pieces to clear the Aged Receivable report.

The Balance Sheet in the "getting paid" scenario will show the full $250,000 in the Bank, while the Income Statement will show an additional contra expense based profit of $1,250.