Bad Debt Expense — Core Concepts
Seven topics covering everything from the matching principle to multi-step recovery entries. Click any card to expand.
When companies sell on credit, some customers inevitably fail to pay. Bad Debt Expense represents the cost of those uncollectible accounts — a real cost of doing business on credit.
GAAP requires applying the matching principle: the expense must be estimated and recorded in the same period as the credit sale that generated it. Two methods exist:
- Direct Write-Off Method — simple but not GAAP for material amounts
- Allowance Method — GAAP-compliant, uses estimation
Key Concept: Net Realizable Value
Accounts Receivable should appear on the balance sheet at its Net Realizable Value — the amount the company actually expects to collect.
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