Financial Glossary
Bad Debt Expense
Bad debt expense is the amount a business recognizes as a cost when accounts receivable are deemed uncollectible. It reflects revenue that was recorded on credit but will never actually be received. Companies estimate it using either the direct write-off method or the allowance method, which sets aside a reserve based on historical collection patterns.
Problem & Application
For owner-operated businesses that invoice clients, vendors, or event customers, unpaid receivables quietly erode profit if they are never written down. A campground that bills group bookings on terms, or a startup invoicing enterprise customers, can show inflated revenue and assets until bad debt is recognized. Tracking it keeps the balance sheet honest and gives a realistic view of how much billed revenue actually converts to cash.
In Short
Recording bad debt expense ensures financial statements reflect only the revenue a business can realistically collect. It is a core part of accurate accrual accounting.