Bad Debt Expense

Bad Debt Expense (Definition)

Bad debt expense is the cost that a business incurs when a customer fails to pay for goods or services purchased on credit. It represents the amount of accounts receivable that a company does not expect to collect.

Key aspects of bad debt expense include:

1. Recognized as an expense on the income statement
2. Helps to provide a more accurate picture of a companys financial health
3. Can be estimated using various methods, such as the percentage of sales method or the aging of accounts receivable method
4. Impacts a companys accounts receivable and overall profitability
5. Requires periodic review and adjustment based on actual collection experiences
6. Can be influenced by economic conditions and industry-specific factors
7. May be tax-deductible, subject to specific rules and regulations

Proper management of bad debt expense is crucial for maintaining accurate financial statements and assessing credit risks.