kayode10
VIP Contributor
Overtime you might end up becoming a business owner when you are trying to increase your streams of income. But that is one of the things that are on affordable in businesses.
in case you don't know, bad debt expense is the amount of money that a company writes off as uncollectible from customers who have failed to pay their debts. It is very important to know this in order to come out clean to the investors at the annual general meeting.
Bad debt represents a loss for the company and is therefore recorded as an expense on the company's income statement. There are several methods for calculating bad debt expense, including the direct write-off method and the allowance method.
The first which is the direct write-off method involves writing off the accounts receivable as bad debt as soon as the company realizes that a customer is unable to pay the debt.
This method is simple to use but can lead to large fluctuations in bad debt expense and a delay in recognizing the expense, this should be done on book.
The allowance method is more commonly used as it provides a more accurate estimate of bad debt expense and it is adopted by most organisations and companies. This method involves creating an allowance account for the this purpose and regularly estimating the amount of bad debt that is likely to occur.
The estimate is based on historical trends of the customers buying history, the company's current economic conditions, and the aging of accounts receivable. The bad debt expense is then recorded in the income statement by reducing the allowance account balance.
Regardless of the method used, it is important for companies to have a system in place for regularly monitoring and estimating bad debt expense in order to keep the loss low.
This approach helps to ensure that the expense is accurately reflected in the financial statements and provides a more accurate picture of the company's financial performance.
in case you don't know, bad debt expense is the amount of money that a company writes off as uncollectible from customers who have failed to pay their debts. It is very important to know this in order to come out clean to the investors at the annual general meeting.
Bad debt represents a loss for the company and is therefore recorded as an expense on the company's income statement. There are several methods for calculating bad debt expense, including the direct write-off method and the allowance method.
The first which is the direct write-off method involves writing off the accounts receivable as bad debt as soon as the company realizes that a customer is unable to pay the debt.
This method is simple to use but can lead to large fluctuations in bad debt expense and a delay in recognizing the expense, this should be done on book.
The allowance method is more commonly used as it provides a more accurate estimate of bad debt expense and it is adopted by most organisations and companies. This method involves creating an allowance account for the this purpose and regularly estimating the amount of bad debt that is likely to occur.
The estimate is based on historical trends of the customers buying history, the company's current economic conditions, and the aging of accounts receivable. The bad debt expense is then recorded in the income statement by reducing the allowance account balance.
Regardless of the method used, it is important for companies to have a system in place for regularly monitoring and estimating bad debt expense in order to keep the loss low.
This approach helps to ensure that the expense is accurately reflected in the financial statements and provides a more accurate picture of the company's financial performance.
