Skip to content
Wikiaccounting
  • Small Business Tools
    • Accounting Software
    • QuickBooks
  • Audit
    • Audit Approaches
    • Assertions
    • Audit Committee
    • Audit Opinion
    • Audit Plan
    • Audit Procedures
    • Financial Statements
    • Audit Risks
    • Internal Audit
    • Audit Sampling
  • Financial Accounting
    • Account Receivable
    • Account Payable
    • Fixed Assets
    • Bank reconciliation
    • Factoring Account Receivable
    • Financial Planning
    • Forensic Accounting
    • Financial Ratios
      • Assets Turnover Ratio
    • Accounting Principle
    • Accounting Documents
    • Financial Statements
      • Balance Sheet
      • Current Assets
      • Equity
Search
Wikiaccounting
Search
  • Small Business Tools
    • Accounting Software
    • QuickBooks
  • Audit
    • Audit Approaches
    • Assertions
    • Audit Committee
    • Audit Opinion
    • Audit Plan
    • Audit Procedures
    • Financial Statements
    • Audit Risks
    • Internal Audit
    • Audit Sampling
  • Financial Accounting
    • Account Receivable
    • Account Payable
    • Fixed Assets
    • Bank reconciliation
    • Factoring Account Receivable
    • Financial Planning
    • Forensic Accounting
    • Financial Ratios
      • Assets Turnover Ratio
    • Accounting Principle
    • Accounting Documents
    • Financial Statements
      • Balance Sheet
      • Current Assets
      • Equity

Journal Entry Bad Debt Expense: Example and Explanation

Account Receivable

Bad debts are unavoidable for companies. Any company that offers credit sales will also have bad debts associated with them. It is because when a company offers credit sales, it accumulates accounts receivables. Accounts receivables are a group of balances that represents payments owed by third parties, usually customers, to the company.

Every company has its own credit policies. These policies depend on several factors, such as the size of the company, its nature, the industry it operates in, policies of its competitors, etc. Some companies may not offer credit terms at all and transact in cash only. However, for some others, not offering credit sales may not be an option.

Definition

Bad debt is a concept closely related to accounts receivable. Bad debts represent any balance that a company determines is unrecoverable. Bad debts can happen due to several reasons. For example, if a customer goes bankrupt or liquidates, it may not be able to repay its liabilities. Similarly, if the company does not evaluate the creditworthiness of a customer properly, it may result in bad debts.

Bad debt is an expense for a company. That is why it is a part of its Income Statement. However, bad debts also affect the Balance Sheet of the company. It is because bad debts cause a reduction in its accounts receivable balances, which is a Balance Sheet item. Overall, bad debts are bad for any company as they can result in significant losses.

Explanation

When it comes to bad debts, there are not many controls that companies can implement. It is because, for almost all companies around the world, bad debts are inevitable. Some companies may introduce credit policies and have a dedicated credit control department to tackle the issue. However, these still cannot prevent bad debts from happening.

Related article  Accounting for Bad Debt Recovery: Overview, Example, Journal Entries

Bad debts impact a company negatively in various ways. First of all, it results in sales without any proceeds. Furthermore, it can disrupt the cash management process of a company when expected cash inflows from accounts receivable fail to realize. Likewise, bad debts also increase the expenses of a company, which may result in losses for them.

For companies, generating revenues is a primary goal. It is because higher sales mean more profits and cash inflows. However, if they fail to recover the associated receipt with those sales, generating revenues is futile. Therefore, bad debts can be problematic for any company. The lower that companies can maintain their bad debts, the better it is for them.

Double-entry or Journal entry

There are two ways in which companies may record bad debts. First of all, bad debts may relate to specific accounts or customers. In that case, the expense is direct as it affects the company’s accounts receivable directly. When the company can identify the particular balance to which bad debts relate, it can write it off from the specific customer’s account. It is known as the direct method. In the case of a direct write-off, the double-entry is as follows.

DrBad debt expensex
CrCustomer account (Accounts receivable)x

In other circumstances, a company may also determine the percentage of its expected bad debts. In that case, the company estimates its bad debts for the period based on past experiences. Once it determines the amount, the company records it as a bad debt expense while also recognizing an allowance for doubtful debt. It is known as the bad debt allowance method. The double entry for it is as follows.

Related article  What is Accounts Receivable Collection Period? (Definition, Formula, and Example)
DrBad debt expensex
CrAllowance for doubtful debtx

In the case of allowances, the company does not deduct the bad debt from a specific customer’s balance. Instead, it keeps it in a different allowance account, which causes a reduction in accounts receivable. However, it does not affect the accounts receivable balance of a company directly.

Sometimes, companies may also recover the balances they recorded as bad debts. In that case, the net double entry will be as follows.

DrAllowance for doubtful debtx
CrCashx

Example

A company, ABC Co., has total accounts receivable balance of $100,000. Out of this balance, the company considers $10,000 from a specific customer, XYZ Co., to be uncollectable. Similarly, ABC Co. expects a further 10% of the remaining amount to be irrecoverable based on past experiences. Therefore, ABC Co. must record both these transactions as bad debts.

Firstly, ABC Co. must recognize the specific bad debt related to XYZ Co. The double entry will be as follows.

DrBad debt expense $        10,000
CrXYZ Co. (Accounts receivable) $        10,000

After this double entry, the remaining balance in accounts receivable will be $90,000 ($100,000 – $10,000). From this amount, the company can calculate the allowance for bad debts, which will be $9,000 ($90,000 x 10%). The double entry for it will be as follows.

DrBad debt expense $          9,000
CrAllowance for doubtful debt $          9,000

The accounts receivable balance on ABC Co.’s Balance Sheet will be as follows.

Accounts receivable $        90,000
Allowance for doubtful debts $        (9,000)
Net accounts receivable $        81,000

Conclusion

Bad debts are an inevitable part of the business for companies that offer credit sales. These represent balances that a company considers uncollectable. Bad debts can negatively impact a company as they increase expenses while decreasing assets.

Related article  Accounting for Sales Return: Journal Entries and Example
← Previous Post
Next Post →

Related Posts

How to Manage Accounts Receivable for Services Industry Company?

Account Receivable

What is Accounts Receivable Collection Period? (Definition, Formula, and Example)

Account Receivable, Financial Accounting

Accounts Receivable Turnover Ratio Analysis: Overview, Formula, And Analysis

Account Receivable, Financial Ratios

Are the Accounts Receivable Current or Non-assets?

Account Receivable, Q$A

Trending

  • What is the Statement of Sources and Uses of Funds for NGOs? Example and Template
  • LLC Vs. Sole Proprietorship: Which Structure Is Right For You?
  • Pay What You Want Pricing (PWYWP) – (Advantages and Disadvantages Included)
  • Essential Tax Planning Strategies For US Expats
  • How to Calculate Average Fixed Cost? Formula, Definition, and Example
  • HOME
  • ABOUT US
  • POLICIES AND DISCLAIMER
  • CONTACT US
  • ADVERTISE

Copyright © 2025 Wikiaccounting