Bad debt expense

Definition

Bad debt expense is the cost to a company resulting from credit sales that are uncollectible. It represents an estimation of accounts receivable that will not be collected.

5 Must Know Facts For Your Next Test

1. Bad debt expense is recorded on the income statement as an operating expense.
2. Companies estimate bad debt using methods such as the percentage of sales method or the aging of accounts receivable method.
3. This expense reduces the net income and affects the overall profitability of a company.
4. Accurate estimation of bad debt is crucial for proper financial planning and maintaining healthy working capital.
5. Bad debt expense can impact cash flow management, influencing decisions on extending trade credit.

Review Questions

• What financial statement includes bad debt expense?
• Name two methods used to estimate bad debt expense.
• How does bad debt expense affect a company's net income?

Related terms

Accounts Receivable: Money owed to a company by its customers for goods or services sold on credit.

Allowance for Doubtful Accounts: A contra-asset account used to estimate the portion of accounts receivable that may not be collectible.

Trade Credit: The extension of credit by a seller to allow the buyer to pay for goods or services at a later date.