When companies do business on credit, they have accounts payable and accounts receivable. They represent accrued revenues and debts that will eventually come due. A bad debt expense is a cost that is recognized when an entity is unable to collect a receivable due to a customer being unable to pay. It’s the result of default. Bad debt expense is the accounting standard for removing uncollectable debt from accounts receivable.
Bad debt expense is something every business needs to plan for. Bad debt is part of doing business on credit, and you can’t control the circumstances or priorities of others. Understanding bad debt expense is important for investors who are researching a business and its financial records.
Sven Franssen