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Bad Debt Expense: Definition and Meaning
Definition
Bad debt expense is the expense recognized when a business determines that some customer receivables may not be collected.
Why It Matters
Extending credit to customers involves collection risk. Recognizing bad debt expense helps a company reflect the estimated cost of that risk in the period in which related sales occurred or when collection concerns become known.
Businesses should monitor aging reports, collection patterns, disputed invoices, customer concentration, and changes in customer financial condition. These factors can affect the estimate of expected uncollectible amounts.
Example
A business concludes that a customer’s $4,000 overdue balance is unlikely to be collected and records bad debt expense, subject to its accounting policy.
Related Terms
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