what is bad debt expense

Bad debt expense is an accounting entry that lists the dollar amount of receivables a company does not expect to collect. It is recognized when a receivable is no longer collectible because a customer is unable to fulfill their obligation to pay an outstanding debt due to financial difficulties or a disagreement over the product or service they were sold. Bad debt expense is generally classified as sales and general administrative expense and is posted to the income statement. It is a natural part of any business that extends credit to customers or clients. Companies retain the right to collect these receivables should conditions change. Bad debt expense can be reported on the financial statements using the direct write-off method or the allowance method. The allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case, the accounts receivable. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time.