Bad Debt Expense
Definition: Expense for estimated uncollectible receivables
Scope:ModerateDifficulty:Moderate
Expense for estimated uncollectible receivables
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Estimate uncollectible accounts (Allowance Method) | ||
| At year-end, management estimates $3,120 of receivables will not be collected. | ||
| Bad Debt ExpenseExpense+ | $3,120 | |
| Allowance for Doubtful AccountsContra Asset+ | $3,120 | |
| Increases expense, increases contra-asset. Net receivables decrease but no specific customer is removed. | ||
| 2. Write off a specific account | ||
| Customer XYZ's $1,500 balance is deemed uncollectible. | ||
| Allowance for Doubtful AccountsContra Asset− | $1,500 | |
| Accounts Receivable — XYZAsset− | $1,500 | |
| Reduces both the allowance and A/R by $1,500. Net receivables unchanged — the loss was already estimated in entry 1. | ||
| 3a. Recovery — reinstate the receivable | ||
| XYZ unexpectedly pays. First, reverse the write-off. | ||
| Accounts Receivable — XYZAsset+ | $800 | |
| Allowance for Doubtful AccountsContra Asset+ | $800 | |
| Restores the receivable and the allowance balance. | ||
| 3b. Recovery — record the cash receipt | ||
| Then record the payment received from XYZ. | ||
| CashAsset+ | $800 | |
| Accounts Receivable — XYZAsset− | $800 | |
| Cash increases, A/R decreases. The customer's ledger shows the full payment history. | ||
| 4. Direct write-off (alternative method) | ||
| Under the direct write-off method, expense is recorded only when a specific account is known to be uncollectible. Not GAAP-preferred for material amounts. | ||
| Bad Debt ExpenseExpense+ | $1,500 | |
| Accounts Receivable — XYZAsset− | $1,500 | |
| Bypasses the allowance account. Simpler but violates the matching principle — expense may be recorded in a different period than the related revenue. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Bad Debt ExpenseBad Debt ExpenseExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$3,120.00
$1,500.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$4,620.00
Allowance for Doubtful AccountsAllowance for Doubtful AccountsLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$1,500.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$3,120.00
$800.00
Normal bal. ▶
$2,420.00
Accounts Receivable — XYZAccounts Receivable — XYZAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$1,500.00
$800.00
$1,500.00
$3,000.00
CashAsset account. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$800.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$800.00
DurationN/A
Related Subjects
External Links
- Bad debt — Wikipedia