Bad Debt Expense
The cost recognized when accounts receivable are deemed uncollectible, matched to the period revenue was earned.
What is Bad Debt Expense?
Bad debt expense is the amount a company recognizes on its income statement when it estimates that a portion of its accounts receivable will not be collected. Under GAAP, the allowance method is preferred: companies estimate uncollectible amounts each period and record a contra-asset called the allowance for doubtful accounts to offset gross accounts receivable. The direct write-off method — recording the expense only when a specific account is deemed uncollectible — is simpler but violates the matching principle and is generally not accepted under GAAP for material amounts.
Example
A retailer with $5 million in accounts receivable estimates that 2% will be uncollectible based on historical collection rates. It records a $100,000 bad debt expense and increases the allowance for doubtful accounts by the same amount, reducing net receivables to $4.9 million on the balance sheet. When a specific customer account of $15,000 is later confirmed as uncollectible, it is written off against the allowance — no additional expense is recorded at that time.
Source: FASB — ASC 310: Receivables