Bad Debt Expense Calculator
💼 How to Calculate Bad Debt Expense – Complete Guide for Businesses & Students
Struggling with unpaid invoices or uncollectible accounts? Knowing how to calculate bad debt expense is essential for maintaining accurate financial records and preparing for financial statements or tax deductions.
✅ Useful for Accountants, Business Owners, Students & Finance Professionals
✅ Includes Direct Write-Off & Allowance Method | With Examples
📌 What Is Bad Debt Expense?
Bad debt expense represents money your business expected to receive (from accounts receivable) but can no longer collect due to customer default, insolvency, or dispute.
It’s reported as an expense on the income statement, reducing net income, and ensures your financials reflect a realistic picture of receivables.
✅ Methods to Calculate Bad Debt Expense
There are two main methods:
1. 📉 Direct Write-Off Method
Used by small businesses and in cash-based accounting (less GAAP-compliant).
Formula:
javaCopyEditBad Debt Expense = Amount of Specific Uncollectible Account
Example:
If a customer owes ₹12,000 and declares bankruptcy:
➡️ Bad Debt Expense = ₹12,000
When to Use:
- Rare, unexpected bad debts
- Simpler records
- Smaller businesses
2. 📊 Allowance Method (GAAP-Approved)
Used in accrual accounting, more accurate and forward-looking.
a) Percentage of Sales Method
Estimate based on historical % of sales that turn bad.
Formula:
javaCopyEditBad Debt Expense = Total Credit Sales × Estimated % Uncollectible
Example:
Total credit sales = ₹5,00,000
Estimated uncollectible = 2%
➡️ Bad Debt Expense = ₹10,000
b) Aging of Accounts Receivable Method
Uses aged receivables (30, 60, 90+ days overdue) and assigns risk levels.
| Age Bracket | Outstanding Amount | Est. % Uncollectible | Expected Loss |
|---|---|---|---|
| 0–30 days | ₹1,00,000 | 1% | ₹1,000 |
| 31–60 days | ₹40,000 | 5% | ₹2,000 |
| 61–90 days | ₹20,000 | 10% | ₹2,000 |
| 90+ days | ₹10,000 | 50% | ₹5,000 |
➡️ Total Bad Debt Expense = ₹10,000
📈 Where Is Bad Debt Expense Recorded?
- Income Statement: As an operating expense
- Balance Sheet: As a reduction to Accounts Receivable via the Allowance for Doubtful Accounts
🎯 Why It Matters
- Keeps financial records accurate
- Helps assess true profitability
- Ensures compliance with GAAP or IFRS
- Useful for audits, tax filings, and cash flow planning
🔍 Frequently Asked Questions (FAQs)
1. What is bad debt expense in simple terms?
It’s the cost a company records when it realizes it won’t receive money it was owed by customers.
2. Can I deduct bad debt expense on my taxes?
Yes, in many countries, bad debts are deductible — but usually only if you use the accrual method and can prove the amount is uncollectible.
3. Which method is better — Direct or Allowance?
The Allowance method is preferred by accountants and auditors as it estimates future losses and is more compliant with accounting standards.
4. Is bad debt the same as doubtful debt?
Not exactly. Doubtful debt is expected to be uncollectible, while bad debt is confirmed uncollectible and written off.
5. How often should I calculate bad debt expense?
Typically monthly or quarterly, especially before closing books or preparing reports.