Final answer:
GAAP permits the use of the allowance method for recognizing bad debt. This entails estimating and setting aside an allowance for doubtful accounts to offset receivables on the balance sheet, and adjusting the allowance as actual bad debts become apparent.
Step-by-step explanation:
The method for recognizing bad debt that is allowed by GAAP (Generally Accepted Accounting Principles) is the allowance method. This method involves estimating the amount of accounts receivable that is unlikely to be collected in the future. The estimation is based on historical data and management's judgment about current economic conditions and customer creditworthiness.
The allowance method works by creating an allowance for doubtful accounts, a contra asset account, that is used to offset the accounts receivable balance on the balance sheet. When a specific account is identified as uncollectible, the amount is written off against the allowance. If the actual bad debts differ from the estimated amount, adjustments are made to the allowance to reflect the reality of the bad debts incurred.