Bad debt expense: definition, how to calculate it and journal entries

Bad debt expense is the cost recorded when a business concludes that money owed by a customer will not be collected. It reduces profit and the value of accounts receivable.

Two ways to record it

• Direct write-off method: record the expense only when a specific invoice is judged uncollectible. Simple, common in small businesses.
• Allowance method: estimate likely bad debts in advance and record them in an allowance for doubtful accounts. Required under accrual accounting standards for many businesses.

Calculating an allowance

A common approach applies a percentage to each aging bucket. For example, you might estimate 1% of current invoices, 5% of 31–60 day invoices and 25% of invoices over 90 days. The percentages should come from your own collection history, not a generic table.

Example journal entries

• Direct write-off: debit Bad debt expense, credit Accounts receivable.
• Allowance estimate: debit Bad debt expense, credit Allowance for doubtful accounts.
• Later write-off under allowance: debit Allowance for doubtful accounts, credit Accounts receivable.

Before you write it off

Writing off a debt is an accounting decision, not a reason to stop asking for payment. Make sure the customer received the invoice, was reminded on a clear schedule and had a chance to raise any dispute. A recovered invoice is always better than a deduction.

Reducing bad debt

• Check credit and take deposits from new customers.
• Invoice promptly with clear terms.
• Follow up consistently from the first day overdue.
• Escalate the oldest invoices before they pass 90 days.

AI Money Recovery keeps follow-up consistent and on record, requires your approval before anything is sent, and charges a performance fee only when money is recovered. Tax treatment of bad debts varies; confirm with your accountant.

Frequently asked questions

Is bad debt expense an operating expense?

It is usually reported as an operating expense, often within selling, general and administrative costs.

What is the difference between bad debt and doubtful debt?

A doubtful debt might not be collected; a bad debt has been judged uncollectible and written off.

Can I still collect after writing off a debt?

Often yes. If paid later, the recovery is recorded by reversing the write-off and recording the cash.

Is bad debt tax deductible?

In many jurisdictions business bad debts can be deductible under conditions. Confirm the rules with your accountant.