An expense account that reflects the amount of your company's accounts that are not collectable, that is the amount of your company's accounts that are "bad debts." A "bad debt expense" account is an expense account of your company. A typical company makes an estimate as to how much it has in bad debts on a periodic (usually monthly) basis. An account that you "wrote-off" as not collectable, but that was later paid by the customer is called bad debt recovery.

Bad Debt Expense

There are two methods to account for bad debt:

• Direct write off method (Non - GAAP): A receivable which is not considered collectible is charged directly to the income statement.

• Allowance method (GAAP): An estimate is made at the end of each fiscal year of the amount of bad debt. This is then accumulated in a provision which is then used to reduce specific receivable accounts as and when necessary.

The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for Doubtful Accounts. At the end of each accounting cycle, adjusting entries are made to charge as expense the uncollectible receivable. The actual amount of uncollectible receivable is written off as an expense from Allowance for Doubtful Accounts to the account called Bad Debt Expense.

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"If your company uses cash basis accounting, you don't need to worry about accounting for bad debts because you record income only when you receive a payment from your customer. However, if your company uses accrual basis accounting you record income when the sale is made to your customer. If you are like most businesses, you know that a certain of your accounts will not be collectable. If you set up an allowance for bad debts, your company's books and records will be more accurate.

What is bad debt expense?

An allowance for bad debts account is kind of like a savings account for bad debts. Your company puts money into it on a periodic basis as an expense of the company. When you decide that a particular account is not collectable, you tap the allowance for bad debts account to pay for the bad debt. Because you already made the allowance for bad debts, your profit and loss statement will not be out of whack in the particular month that you decide to write-off a particular account."

You can deduct part of a debt that becomes worthless and that you write off on your books. You do not necessarily have to charge off partially worthless debts on your books every year. You could delay the charge-off until a subsequent year, but you cannot take a deduction in a year after the debt becomes totally worthless.