Bad Debt Expense
The cost of extending credit to customers who fail to pay, representing uncollectible accounts receivable that must be written off as a business expense.
Bad Debt Expense
The cost associated with extending credit to customers who ultimately fail to pay, representing the portion of accounts receivable that becomes uncollectible.
For instance, a wholesale distributor with $2 million in annual credit sales might estimate based on experience that 1.5% will prove uncollectible, recording $30,000 as bad debt expense and establishing an allowance for doubtful accounts of the same amount.
Bad debt expense is typically recognized in the same period as the related sales using either the percentage of sales method (based on historical uncollectible rates) or the aging of receivables method (analyzing overdue accounts). This approach follows the matching principle by aligning expenses with the revenue they helped generate, providing a more realistic picture of net sales performance.