Bad Debt Expense Journal Entry

Overview

Bad debt expense is the loss that incurs from the uncollectible accounts where the customers did not pay the amount owed. The company should estimate loss and make bad debt expense journal entry at the end of the accounting period.

Properly making journal entry for bad debt expense can help the company to have a more realistic view of its net profit as well as making total assets reflect its actual economic value better. This is due to the value of accounts receivable in the balance sheet should state at the cash realizable value and the period that expense incurs should match with the time that revenue earns.

However, sometimes when the losses from bad debt are insignificant or when the company only has a small amount of credit sales, it may choose to make the journal entry of bad debt expense only when the company decides to write off a particular account of its customers. This is the case, where the company follows the direct write-off method.

Bad Debt Expense Journal Entry

We may come across two methods of journal entry for bad debt expense as below:

• Allowance method
• Direct write-off method

Allowance method

Under the allowance method, the company records the journal entry for bad debt expense by debiting bad debt expense and crediting allowance for doubtful accounts.

Account	Debit	Credit
Bad debt expense	000
Allowance for doubtful accounts		000

For example, the company ABC Ltd. had the credit sales amount to USD 1,850,000 during the year. Based on past experiences and its credit policy, the company estimates that 1% of credit sales which is USD 18,500 will be uncollectible.

In this case, the company will make journal entry of bad debt expense for the year-end adjusting entry as below:

Account	Debit	Credit
Bad debt expense	18,500
Allowance for doubtful accounts		18,500

The company usually uses the allowance method to account for bad debt expense as it excludes the accounts receivable that are unlikely to be recoverable in the report. This helps the company to have a more realistic view of its accounts receivable.

With the allowance method, allowance for doubtful accounts is recognized in the balance sheet as the contra account to receivables. This would ensure that the company states its accounts receivable on the balance sheet at their cash realizable value.

For the income statement, using the allowance method helps the company to have better matching of the period which the revenue earns and the period which bad debt expense incurs. Hence, making journal entry of bad debt expense this way conforms with the matching principle of accounting.

Direct write-off method

Under the direct write-off method, the company records the journal entry for bad debt expense by debiting bad debt expense and crediting accounts receivable.

Account	Debit	Credit
Bad debt expense	000
Accounts receivable		000

For example, company XYZ Ltd. decides to write off one of its customers, Mr. Z as uncollectible with a balance of USD 350.

In this case, under the direct write-off method the company can record the bad debt expense journal entry as below:

Account	Debit	Credit
Bad debt expense	350
Accounts receivable		350

Unlike the allowance method, the company only records bad debt expense when they determine a particular account to be uncollectible. And as the name suggested, bad debt expense will only show up when the company decides to write off any particular accounts.

With the direct write-off method, the company usually record bad debt expenses in a different period of those revenues that they are related to. This method doesn’t attempt to match bad debt expense to sales revenue in the income statement. Likewise, the direct write-off method does not conform to the matching principle of accounting at all.