1. What is Bad Debt Expense?

Bad Debt Expense represents the amount of accounts receivable that a company does not expect to collect. It is recorded using the allowance method for bad debt, which estimates uncollectible accounts and matches expenses with revenues in the same accounting period.

2. How Does the Calculator Work?

The calculator uses the Bad Debt Expense formula:

Where:

• \( \text{Ending AR} \) — Ending Accounts Receivable balance in USD
• \( \text{Bad Debt \%} \) — Estimated percentage of uncollectible accounts

Explanation: This calculation uses the percentage of sales method or aging method to estimate the amount of accounts receivable that will likely become uncollectible.

3. Importance of Bad Debt Expense Calculation

Details: Accurate bad debt expense calculation is crucial for proper financial reporting, matching principle compliance, and realistic assessment of a company's financial health and liquidity position.

4. Using the Calculator

Tips: Enter the ending accounts receivable balance in USD and the estimated bad debt percentage. The bad debt percentage is typically based on historical collection experience or industry averages.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between direct write-off and allowance method?
A: Direct write-off method records bad debts only when specific accounts are deemed uncollectible, while allowance method estimates and records bad debts in advance using historical data.

Q2: How is the bad debt percentage determined?
A: The percentage is typically based on the company's historical collection experience, industry averages, or aging analysis of accounts receivable.

Q3: When should bad debt expense be recorded?
A: Bad debt expense should be recorded in the same accounting period as the related credit sales to comply with the matching principle.

Q4: What is the journal entry for bad debt expense?
A: Debit Bad Debt Expense and credit Allowance for Doubtful Accounts. When specific accounts are written off, debit Allowance for Doubtful Accounts and credit Accounts Receivable.

Q5: How does bad debt expense affect financial statements?
A: It reduces net income on the income statement and reduces accounts receivable (net) on the balance sheet through the allowance for doubtful accounts.