Bad debt expense is recognized in the same accounting period as the revenue that is related to the receivable because a customer is unable to fulfill their obligation to pay an outstanding debt due to bankruptcy or other financial problems.
What Are Bad Debt Costs?
When a receivable is no longer recoverable as a result of a customer's inability to pay an outstanding debt owing to bankruptcy or other financial issues, a bad debt expense is recorded. Companies that offer credit to their clients record bad debts as an allowance for doubtful accounts, sometimes referred to as a provision for credit losses, on their balance sheet.
Bad debt costs are typically listed on the income statement as a sales and general administrative expenditure. Accounts receivable on the balance sheet are reduced when bad debts are recognized, but firms still have the right to collect money if the situation changes.
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