What expense category is bad debt?

There is no definitive answer to this question, as it will depend on the accounting method used by the business owner or finance team. However, some common expense categories for bad debt include 'accounts receivable', 'allowance for doubtful accounts', or 'bad debt expense'.

Accounts Receivable

If a business uses the accrual basis of accounting, then bad debt is typically recorded as an 'accounts receivable'. This is because the debt is still considered to be owed to the business, even though it is unlikely to be collected. For businesses using this accounting method, an 'allowance for doubtful accounts' may also be used to estimate the amount of bad debt that is expected.

Allowance for Doubtful Accounts

The 'allowance for doubtful accounts' is an estimate of the amount of bad debt that a business expects to incur. This estimate is typically based on historical data, such as the percentage of accounts receivable that have been written off as bad debt in previous periods. This method is often used in conjunction with the accrual basis of accounting.

Bad Debt Expense

Under the cash basis of accounting, bad debt is typically recorded as a 'bad debt expense'. This is because the debt is considered to be uncollectible when it is written off. For businesses using this accounting method, an 'allowance for doubtful accounts' may also be used to estimate the amount of bad debt that is expected.

The information provided in this article does not constitute legal or financial advice and is for general informational purposes only. Please check with an attorney or financial advisor to obtain advice with respect to the content of this article.

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