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
- Bad debt expense is recorded on the income statement as an operating expense.
- Companies estimate bad debt using methods such as the percentage of sales method or the aging of accounts receivable method.
- This expense reduces the net income and affects the overall profitability of a company.
- Accurate estimation of bad debt is crucial for proper financial planning and maintaining healthy working capital.
- 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?
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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.
