![]() ![]() The business estimates the amount of bad debt that it is likely to incur in the future. This is typically done using the allowance method, which involves the following steps:ġ. When a business is unable to collect payment from a customer for a product or service that has been sold on credit, it must record the uncollectible debt as a bad debt expense. It is recorded in the business's financial statements as a reduction in accounts receivable and revenue. Overall, a bad debt expense is a non-cash expense that a business incurs when it is unable to collect payment from a customer for a product or service that has been sold on credit. ![]() This is because the revenue that was originally recognized when the product or service was sold on credit is now considered uncollectible, and must be written off as a bad debt expense. The bad debt expense is also recorded in the business's income statement as a reduction in revenue. When a customer's debt is written off as a bad debt expense, the accounts receivable balance is reduced by the amount of the uncollectible debt. This is because accounts receivable is an asset account that represents the amount of money that a business is owed by its customers. The bad debt expense is recorded in the business's financial statements as a reduction in the accounts receivable (A/R) balance. In either case, the business must write off the uncollectible debt as a bad debt expense. This can happen when a customer is unable to pay their debt, either because they are unable to pay or because they refuse to pay. A bad debt expense is a type of non-cash expense that a business incurs when it is unable to collect payment from a customer for a product or service that has been sold on credit.
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