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September 15, 2009

What is bad debts?

The term bad debts usually refers to accounts receivable (or trade accounts receivable) that will not be collected.  However, bad debts can also refer to notes receivable that will not be collected.

The bad debts associated with accounts receivable is reported on the income statement as Bad Debts Expense or Uncollectible Accounts Expense.

When the allowance method is used, the journal entry to Bad Debts Expense will include a credit to Allowance for Doubtful Accounts, a contra account and valuation account to the asset Accounts Receivable. The allowance method anticipates the losses and therefore requires the use of estimates.

Under the direct write-off method, the Allowance for Doubtful Accounts is not used. Rather, Bad Debts Expense will be debited when an account receivable is actually written off. The credit in this entry will be to the asset Accounts Receivable.

Learn more about Accounts Receivable and Bad Debts Expense.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

8 Responses to “What is bad debts?”

  1. cathy on September 26th, 2009 4:40 am

    if i’m asked to prepare a balance sheet without given net profit. hw do i calculate net profit

  2. Chad on October 5th, 2009 4:51 pm

    I would say to prepare a balance sheet up to the end of the period in question. Net profit (loss) is part of the income statement. Net profit(loss) is subsequently closed to the owners equity (Proprietorship and partnership) or to retained earnings (corporation) where it is then reported as part of the balance sheet after all adjustments have been made. If you have access to a worksheet, usually done by hand and most commonly by a computer program, you can figure out the period end/ year end accounts

  3. malatesh on October 21st, 2009 4:15 am

    1.what is mean revenuve
    2.explane about the capital expenditure

  4. Junaid on October 27th, 2009 4:26 am

    Bad debts are those receivable amounts from debtors, which are doubtful to be received.

  5. Mike on November 24th, 2009 9:57 am

    Can bad debt can later become good debt

  6. Mahmoud on November 30th, 2009 1:47 pm

    Dear …

    Thank you for this helpful website.

    Kindly inform me about the entry when we use the allowance method and when we use the direct write off method.

    Best regards
    Mahmoud Fathy

  7. Kayla on December 22nd, 2009 11:31 am

    how do I reserve a bad debt in MRI? Thanks

  8. cp on December 30th, 2009 6:09 pm

    if an invoice is over billed, when the cash receipt is received for the lower amount, how do you clear up the difference? Is it a true bad debt? Or, should the revenue account be adjusted since it was billed incorrectly? Does it matter that the revenue was recorded in one month and the cash receipt and correct in a following month?

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