What is Bad Debts ?

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The term bad debts usually refers to accounts receivable that will not be collected. However, bad debts can also refer to notes receivable that will not be collected.

The bad debts associated with accounts receivable is reported on the income statement as Bad Debts Expense or Uncollectible Accounts Expense.

When the allowance method is used, the journal entry to Bad Debts Expense will include a credit to Allowance for Doubtful Accounts

The term bad debts usually refers to accounts receivable (or trade accounts receivable

that will not be collected. However, bad debts can also refer to notes receivable that will not be collected.

The Allowance for Doubtful Accounts is not used. Rather, Bad Debts Expense will be debited when an account receivable is actually written off. The credit in this entry will be to the asset Accounts Receivable.

The bad debts associated with accounts receivable is reported on the income statement as Bad Debts Expense or Uncollectible Accounts Expense.

When the allowance method is used, the journal entry to Bad Debts Expense will include a credit to Allowance for Doubtful Accounts, a contra account and valuation account to the asset Accounts Receivable. The allowance method anticipates the losses and therefore requires the use of estimates.

Under the direct write-off method, the Allowance for Doubtful Accounts is not used. Rather, Bad Debts Expense will be debited when an account receivable is actually written off.

It is common to see two methods for computing the amount of bad debts expense:

1.direct write-off method
2.allowance method

The direct write-off method requires that a customer's uncollectible account be first identified and then removed from the account Accounts Receivable.

Under the direct write-off method, the Allowance for Doubtful Accounts is not used. Rather, Bad Debts Expense will be debited when an account receivable is actually written off.

Bad debt is a loss that a company incurs when credit that has been extended to customers becomes worthless, either because the debtor is bankrupt, has financial problems or because it cannot be collected. It is expensed on the income statement.

The allowance method anticipates that some of the accounts receivable will not be collected.

the company will debit Bad Debts Expense and will credit Allowance for Doubtful Accounts for an estimated, anticipated amount.

Bad debt is an expense that all businesses have to allow for. Companies that make sales on credit often estimate the percentage of sales they expect to become bad debt, based on past experience, and record this in the allowance for doubtful accounts, which is also known as a provision for credit losses.

Bad debt is generally classified as a sales and general administrative expense and is found on the income statement. Recognizing bad debt leads to an offsetting reduction to accounts receivable on the balance sheet

though businesses retain the right to collect funds should the circumstances change.

There are two different methods used to recognize credit losses.

With the direct write-off method, there is no contra-asset account such as Allowance for Doubtful Accounts

Using the direct write-off method, uncollectible accounts are written off as they become uncollectible, which is used in the U.S. for income tax purposes.

However, while the direct write-off method records the precise figure for uncollectible accounts, it fails to uphold the matching principle used in accrual accounting and generally accepted accounting principles (GAAP).

The rule is that an expense must be recognized at the time a transaction occurs rather than when payment is made.