Thus, you have a debit of $1,500 in your allowance for your bad debt reserve account. The invoice amount is removed from accounts receivable and charged as a bad debt expense. Thus, the accounts receivable account is credited X amount and your bad debt expense account is debited that same X amount.
This approach allows you to anticipate the bad debt expense before it’s incurred. As a small business owner, you rely on accurate bookkeeping to ensure you run a profitable enterprise. https://www.bookstime.com/articles/contribution-margin-income-statement Well-organized financial documentation allows you to keep track of income, chase unpaid invoices, identify budgetary bottlenecks, and pinpoint areas that could be more cost-efficient.
Alternative Methods for Measuring Bad Debt Expense Calculation
With the allowance method, on the other hand, bad debt is again debited, but allowance for doubtful accounts is credited instead. Investors value financial statements because they can reveal a great deal about a company’s revenue, expenses, profitability, debt burden, and ability to pay short- and long-term financial obligations. Financial statements are accounting documents that demonstrate a company’s financial activity and performance. The Securities and Exchange Commission in the United States requires companies to submit their financial statements on a quarterly and annual basis (SEC). When both inventory days and the collection period are reduced, it’s good news.
To calculate bad debt expenses, divide your historical average for total bad credit by your historical average for total credit sales. This formula gives you the percentage of bad debt, which you bad debt expense calculator can also think of as the percentage of sales estimated to be uncollectable. Bad debt expense is reported within the selling, general, and administrative expense section of the income statement.
