{"id":25190,"date":"2025-11-19T12:32:07","date_gmt":"2025-11-19T12:32:07","guid":{"rendered":"https:\/\/www.mooninvoice.com\/blog\/?p=25190"},"modified":"2026-10-08T06:28:43","modified_gmt":"2026-10-08T06:28:43","slug":"bad-debts-expense","status":"publish","type":"post","link":"https:\/\/www.mooninvoice.com\/blog\/bad-debts-expense\/","title":{"rendered":"Bad debt expense: Definition, formula, examples &#038; how to calculate it"},"content":{"rendered":"<h2>What is bad debt expense?<\/h2>\n<p>Bad Debt Expense (BDE) is the amount a company recognizes as an expense when it does not expect to collect from the customer. Thus, the company recognizes it as a collection loss. There are multiple reasons why this uncollectible accounts expense occurs; some of them are as follows:<\/p>\n<ul class=\"custom-disc-list\">\n<li>The client might go bankrupt.<\/li>\n<li>Stops responding to collection efforts.<\/li>\n<li>The client is unreachable or goes out of business.<\/li>\n<li>Miscommunication that leads to confusion over the payment terms.<\/li>\n<li>The customer is unwilling to settle the outstanding balance.<\/li>\n<\/ul>\n<p>Generally, these expenses lead to financial pressure on the business. It may lead to a reduction in revenue and profitability with changes in <a href=\"https:\/\/www.mooninvoice.com\/blog\/ai-in-accounts-receivable\/\">accounts receivable<\/a> value.<\/p>\n<p>It is important to note that bad debt and bad debt expense are related but not identical. Bad debt is the amount owed (whether from an unpaid invoice or a loan) that the company cannot collect. On the other hand, bad debt loss or expense is an accounting expense recognized for the amount expected or determined to be uncollectible. It is an official expense entry used to record that financial loss on the company\u2019s financial statements.<\/p>\n<h2>Example of bad debt expense<\/h2>\n<p>Suppose a company issues an invoice worth $20,000 to a customer. The company records that amount as accounts receivable because the customer is expected to pay. The client pays $15,000 of the total amount.<\/p>\n<p>Later on, after a long time, the client is unable to pay the remaining $5,000 due to financial issues. The company recognizes the amount as a bad debt expense, assuming that the outstanding amount is unlikely to be collected. Thus, $5,000 will be considered an uncollectible accounts expense.<\/p>\n<h2>How to record bad debt expense?<\/h2>\n<p>There are generally two methods of recording\/reporting bad debt expense on the financial statements.<\/p>\n<h3>1. Direct write-off method<\/h3>\n<p>In this method, you immediately write off the portion of the specific receivable that has been determined to be uncollectible. Generally, it works well when the bad debt expense is small. In the journal entry, debit the uncollectible accounts expense and credit the accounts receivable.<\/p>\n<p>For instance, if a customer owes $500 and the business determines it is an uncollectible amount, then the amount recorded will be as follows:<\/p>\n<table class=\"table-block\">\n<thead>\n<tr>\n<th><b>Account<\/b><\/th>\n<th><b>Debit<\/b><\/th>\n<th><b>Credit<\/b><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Bad debt expense<\/td>\n<td>$500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Accounts receivable<\/td>\n<td><\/td>\n<td>$500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3>2. Allowance method<\/h3>\n<p>In the allowance method, the business or lender assumes that a portion of its receivables may go unpaid. In other words, the company records an estimated bad debt expense in advance, rather than waiting for a payment failure from the client.<\/p>\n<p>It uses a contra-asset account called Allowance for Doubtful Accounts. This reduces the AR value to reflect the amount the business expects to collect.<\/p>\n<p>For instance, if a company has $20,000 in accounts receivable and expects $500 to be uncollectible, then it will record the amount as below:<\/p>\n<table class=\"table-block\">\n<thead>\n<tr>\n<th><b>Account<\/b><\/th>\n<th><b>Debit<\/b><\/th>\n<th><b>Credit<\/b><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Bad debt expense<\/td>\n<td>$500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Allowance for doubtful accounts<\/td>\n<td><\/td>\n<td>$500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Once the assumed amount of $500 is confirmed as uncollectible, the business will do a journal entry as per the write-off method as follows:<\/p>\n<table class=\"table-block\">\n<thead>\n<tr>\n<th><b>Account<\/b><\/th>\n<th><b>Debit<\/b><\/th>\n<th><b>Credit<\/b><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Allowance for doubtful accounts<\/td>\n<td>$500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Accounts receivable<\/td>\n<td><\/td>\n<td>$500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"cta-sc\">\n<p class=\"cta-ttl\"><strong class=\"cta-ttl\">Are your invoices not resulting in on-time payments?<\/strong><\/p>\n<p class=\"cta-cnt\">Explore 66+ customizable invoice templates and create professional and clear invoices in a minute.<\/p>\n<p><a class=\"btn\">Try Moon Invoice<\/a><\/p>\n<\/div>\n<h2>How do you calculate bad debt expense?<\/h2>\n<p>Businesses can perform the bad debt expense calculation by estimating the portion of credit sales or accounts receivable that are expected to be uncollectible. There are three major accounting methods to find this uncollectible expense. The formula for bad debt expense depends on the method used.<\/p>\n<h3>1. Percentage of credit sales method<\/h3>\n<p>According to this method, businesses multiply the net credit sales for the period by the uncollectible estimate percentage. The formula for this method is as follows:<\/p>\n<div class=\"formula-box formula-blue\"><strong>Bad debt expense = Net credit sales x Estimated bad debt percentage<\/strong><\/div>\n<div class=\"spacers-10\"><\/div>\n<p>For example, suppose a company makes total credit sales of $40,000 and estimates that 3% will be uncollectible; the bad debt loss will be as follows:<\/p>\n<p>BDE = $40,000 x 0.03 = $1,200<\/p>\n<h3>2. Percentage of accounts receivable method<\/h3>\n<p>This method is similar to the credit sales method. However, it uses accounts receivable instead of sales. It means it estimates the amount of ending accounts receivable that may be uncollectible. The formula is as follows:<\/p>\n<div class=\"formula-box formula-blue\"><strong>Bad debt expense = Ending accounts receivable x Estimated uncollectible percentage<\/strong><\/div>\n<div class=\"spacers-10\"><\/div>\n<p>For example, suppose a company has ending accounts receivable of $40,000 and an estimated uncollectible percentage of 2%. The bad debt expense is as follows:<\/p>\n<p>BDE = $40,000 x 0.02 = $800<\/p>\n<h3>3. Accounts receivable aging method<\/h3>\n<p>In this approach, the business estimates bad debt based on how long outstanding invoices will remain overdue. The older the invoice, the greater the chances of uncollectible amounts.<\/p>\n<p>The receivable accounts are grouped by age, and an estimated loss rate is assigned as a percentage. This rate is based on the historical data. The formula is as follows:<\/p>\n<div class=\"formula-box formula-blue\"><strong>Estimated uncollectible accounts = Receivable amount x Estimated loss percentage<\/strong><\/div>\n<div class=\"spacers-10\"><\/div>\n<p>For example, suppose a company possesses an aging schedule that looks like this:<\/p>\n<table class=\"table-block\">\n<thead>\n<tr>\n<th><b>Aging category<\/b><\/th>\n<th><b>Receivables<\/b><\/th>\n<th><b>Estimated loss rate<\/b><\/th>\n<th><b>Estimated bad debt<\/b><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Current<\/td>\n<td>$20,000<\/td>\n<td>2%<\/td>\n<td>20,000 x 0.02 = 400<\/td>\n<\/tr>\n<tr>\n<td>31 to 61 days<\/td>\n<td>$15,000<\/td>\n<td>3%<\/td>\n<td>15,000 x 0.03 = 450<\/td>\n<\/tr>\n<tr>\n<td>61 to 90 days<\/td>\n<td>$10,000<\/td>\n<td>4%<\/td>\n<td>10,000 x 0.04 = 400<\/td>\n<\/tr>\n<tr>\n<td>Over 90 days<\/td>\n<td>$5,000<\/td>\n<td>5%<\/td>\n<td>5,000 x 0.05 = 250<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>$50,000<\/td>\n<td><\/td>\n<td>$1,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So, the estimated uncollectible amount is $1,500. However, it is not the final bad debt expense; to find it, you need to subtract the existing allowance from the required allowance.<\/p>\n<p>Suppose $500 is the existing allowance; the uncollectible accounts expense is as follows:<\/p>\n<p>$1,500 &#8211; $500 = $1,000<\/p>\n<h2>How to prevent and reduce bad debt?<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-30760\" src=\"https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1.avif\" alt=\"6 Ways to Prevent and Reduce Bad Debts\" width=\"1644\" height=\"957\" title=\"6 Ways to Prevent and Reduce Bad Debts\" srcset=\"https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1.avif 1644w, https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1-300x175.avif 300w, https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1-1024x596.avif 1024w, https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1-768x448.avif 768w, https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1-1536x894.avif 1536w, https:\/\/cdn.mooninvoice.com\/mi-live\/blog\/wp-content\/uploads\/2025\/11\/10095537\/6-Ways-to-Prevent-and-Reduce-Bad-Debts-1-960x560.avif 960w\" sizes=\"auto, (max-width: 1644px) 100vw, 1644px\" \/><\/p>\n<div style=\"height: 10px;\"><\/div>\n<p>Preventing bad debt helps businesses maintain smooth cash flow, reduce financial losses, and strengthen growth. There are several ways to prevent bad debt, explained below:<\/p>\n<h3>Set clear payment terms<\/h3>\n<p>Either you <a href=\"https:\/\/www.mooninvoice.com\/instant-estimate-maker\">generate an estimate<\/a> or an invoice; always clearly state the payment terms in an understandable format. You must include the due date, available payment methods, and the applicable late fee. This helps achieve on-time payments and reduce the risk of bad debt.<\/p>\n<h3>Perform customer credit checks<\/h3>\n<p>Before extending credit, it is crucial to check a customer\u2019s credit history and financial background. Certain factors such as previous payment behavior, outstanding debt, financial stability, and credit history must be considered and reviewed. This helps set credit limits and payment terms accordingly, reducing the risk of bad debt.<\/p>\n<h3>Establishing a credit policy<\/h3>\n<p>A well-defined credit policy is always helpful in reducing bad debt. It must cover how much credit is allowed, which customers are allowed to use it for, and when and how they need to pay. You must also mention credit limits, payment terms, and late-payment rules.<\/p>\n<h3>Send payment reminders<\/h3>\n<p>Just issuing an invoice and waiting for the payment does not work. You must keep on reminding your client about the payment and take the follow-up wisely. It encourages your client to make on-time payments, which helps to reduce bad debt.<\/p>\n<h3>Restrict credit purchases<\/h3>\n<p>If the customer doesn\u2019t pay the outstanding amount, you can pause credit purchases. Later on, you can allow purchases only after the pending amount is cleared. This is another way to prevent bad debt expense.<\/p>\n<h3>Monitoring accounts receivable aging<\/h3>\n<p>You must track <a href=\"https:\/\/www.mooninvoice.com\/blog\/outstanding-invoice\/\">unpaid invoices<\/a> based on how long they remain unpaid. It helps to prevent future debt by highlighting high-risk accounts. With the clear identification of unpaid invoices, you can take action such as sending payment reminders to encourage payment.<\/p>\n<div class=\"blog-cta-main blog-cta-tip\">\n  <strong><span class=\"cta-icon\">\ud83d\udca1<\/span>Good to know<\/strong><\/p>\n<p>Using&nbsp;<a href=\"https:\/\/www.mooninvoice.com\/expense-tracking-software\">expense tracking software<\/a> ,you can streamline your business\u00a0expense management. It helps you track end-to-end transactions and get a clear picture to make informed decisions.<\/p>\n<\/div>\n<h2>Get your accounting workflow smarter with Moon Invoice<\/h2>\n<p>With manual handling of your accounting and finances, you may encounter errors along with a sluggish process. Moon Invoice helps overcome this issue with digital concepts and advanced features.<\/p>\n<p>Trusted by over 1.7M global users, this <a href=\"https:\/\/www.mooninvoice.com\/online-invoicing-software\">AI-powered invoicing software<\/a> helps businesses streamline their billing process. It reduces errors, saves professionals time, and speeds up the workflow.<\/p>\n<p><strong>AI automation:<\/strong> Its AI-rich features help speed up workflows and boost overall productivity. You can create invoices, estimates, and receipts with its quick scan feature. Additionally, you can quickly record payments and contacts through AI by uploading the required details.<\/p>\n<p><strong>Customizable templates:<\/strong> It offers 66+ customizable <a href=\"https:\/\/www.mooninvoice.com\/free-invoice-template\">invoice templates<\/a> that let you create personalized, professional, and clear invoices in minutes.<\/p>\n<p><strong>Centralized platform:<\/strong> The centralized system helps manage all the documents in one place. This prevents any document or information from being lost or missing, enhancing systematic document management.<\/p>\n<p><strong>Real-time tracking:<\/strong> Supports 15+ reports that showcase the outstanding balance and other financial metrics to make informed decisions.<\/p>\n<p><strong>Recurring invoicing:<\/strong> Additionally, this invoicing software allows you to set recurring invoices for ongoing purchases. It ensures you never miss issuing any invoice for a single sale.<\/p>\n<p><strong>Payment reminder:<\/strong> Easily set payment reminders for your customers. This ultimately contributes to on-time payment, which helps prevent unpaid invoices.<\/p>\n<p><strong>Multiple payment methods:<\/strong> Moon Invoice supports various payment gateways, including Stripe, PayPal, UPI, Apple Pay, and Google Pay. This allows businesses to offer convenience to the customer.<\/p>\n<p><strong>Tracking of unpaid invoices:<\/strong> Simply track the due amount by applying a filter in the invoice.<\/p>\n<p>Using Moon Invoice, businesses can reduce late payments and improve collection efficiency. This lowers the likelihood of uncollectible amounts that could become bad debt expense.<\/p>\n<div class=\"cta-banner-revamp round-circle\">\n<div class=\"cta-banner-wrap\">\n<div class=\"cta-left-div\">\n<p class=\"font-white fs-30 m-0 mb-15 text-start\">Overdue payments?\u00a0<span class=\"font-yellow\">Your business\u2019s worst enemy.<\/span><\/p>\n<p class=\"font-white fs-16 m-0 mb-30 text-start max-w-375\">Reduce them with Moon Invoice before they become bad debt.<\/p>\n<div class=\"cta-info-wrap\">\n<div class=\"cta-info-sub-div\"><img decoding=\"async\" src=\"https:\/\/cdn.mooninvoice.com\/image\/images\/newhome\/cta-icons.png\" alt=\"CTA icon\" \/><br \/>\n<span class=\"font-yellow fs-14\">Create professional invoices<\/span><\/div>\n<div class=\"cta-info-sub-div\"><img decoding=\"async\" src=\"https:\/\/cdn.mooninvoice.com\/image\/images\/newhome\/cta-icons.png\" alt=\"CTA icon\" \/><br \/>\n<span class=\"font-yellow fs-14\">Automate payment reminders<\/span><\/div>\n<div class=\"cta-info-sub-div\"><img decoding=\"async\" src=\"https:\/\/cdn.mooninvoice.com\/image\/images\/newhome\/cta-icons.png\" alt=\"CTA icon\" \/><br \/>\n<span class=\"font-yellow fs-14\">Flexible payment options<\/span><\/div>\n<\/div>\n<div class=\"btn-div\"><a style=\"display: block; width: max-content; height: max-content;\" href=\"https:\/\/mooninvoice.neetocal.com\/moon-invoice-demo?utm_source=website&amp;utm_medium=demo_button&amp;utm_campaign=demo_scheduling&amp;utm_ref=blog%2Fbad-debts-expense&amp;utm_content=blog\"><button class=\"btn calltryitlink_btn\">Get a Product Demo<\/button><\/a><\/div>\n<\/div>\n<div class=\"cta_banner_img_div square-dots square-b-none\"><img decoding=\"async\" src=\"https:\/\/cdn.mooninvoice.com\/image\/images\/newhome\/cta_banner_img_new4x.png\" alt=\"CTA Banner\" width=\"350\" \/><\/div>\n<\/div>\n<\/div>\n<h2>Quick answers on bad debt expense<\/h2>\n<div id=\"1-link-25190\" class=\"sh-link 1-link sh-hide\"><h3 onclick=\"showhide_toggle('1', 25190, 'What causes bad debts?', 'What causes bad debts?'); return false;\" aria-expanded=\"false\"><span id=\"1-toggle-25190\" class=\"sh-toggle\" data-more=\"What causes bad debts?\" data-less=\"What causes bad debts?\">What causes bad debts?<\/span><\/h3><\/div><div id=\"1-content-25190\" class=\"sh-content 1-content sh-hide\" style=\"display: none;\">The following are the main reasons bad debts occur:<\/p>\n<ul>\n<li>Financial difficulties on the client side<\/li>\n<li>Unclear payment terms<\/li>\n<li>Fraudulent transactions by customers<\/li>\n<li>Improper accounts receivable monitoring<\/li>\n<li>Excessive credit limits that allow customers to accumulate large unpaid balances<\/li>\n<\/ul>\n<p><\/div>\n<div id=\"2-link-25190\" class=\"sh-link 2-link sh-hide\"><h3 onclick=\"showhide_toggle('2', 25190, 'What is the difference between bad debt expense and allowance for doubtful accounts?', 'What is the difference between bad debt expense and allowance for doubtful accounts?'); return false;\" aria-expanded=\"false\"><span id=\"2-toggle-25190\" class=\"sh-toggle\" data-more=\"What is the difference between bad debt expense and allowance for doubtful accounts?\" data-less=\"What is the difference between bad debt expense and allowance for doubtful accounts?\">What is the difference between bad debt expense and allowance for doubtful accounts?<\/span><\/h3><\/div><div id=\"2-content-25190\" class=\"sh-content 2-content sh-hide\" style=\"display: none;\">While both terms are related, they differ in terms of the information they present. <strong>Bad debt expense<\/strong> appears on the company\u2019s income statement and represents the expense recognized for expected customer non-payment. Allowance for doubtful accounts appears on the balance sheet; it is a contra-asset account that reduces accounts receivable.<\/p>\n<p><\/div>\n<div id=\"3-link-25190\" class=\"sh-link 3-link sh-hide\"><h3 onclick=\"showhide_toggle('3', 25190, 'Is bad debt expense an operating expense? ', 'Is bad debt expense an operating expense? '); return false;\" aria-expanded=\"false\"><span id=\"3-toggle-25190\" class=\"sh-toggle\" data-more=\"Is bad debt expense an operating expense? \" data-less=\"Is bad debt expense an operating expense? \">Is bad debt expense an operating expense? <\/span><\/h3><\/div><div id=\"3-content-25190\" class=\"sh-content 3-content sh-hide\" style=\"display: none;\">Yes, bad debt expense is considered an operating expense on the income statement. It is because it arises from normal business operations.<\/p>\n<p><\/div>\n<div id=\"4-link-25190\" class=\"sh-link 4-link sh-hide\"><h3 onclick=\"showhide_toggle('4', 25190, 'What is the difference between bad debt and doubtful debt?', 'What is the difference between bad debt and doubtful debt?'); return false;\" aria-expanded=\"false\"><span id=\"4-toggle-25190\" class=\"sh-toggle\" data-more=\"What is the difference between bad debt and doubtful debt?\" data-less=\"What is the difference between bad debt and doubtful debt?\">What is the difference between bad debt and doubtful debt?<\/span><\/h3><\/div><div id=\"4-content-25190\" class=\"sh-content 4-content sh-hide\" style=\"display: none;\">Bad debt refers to the confirmed amount that remains uncollected. It has a high certainty that the customer will not pay the amount. Doubtful debt refers to the money that may not be collected. It means the customer may or may not pay the amount.<\/p>\n<p><\/div>\n<div id=\"5-link-25190\" class=\"sh-link 5-link sh-hide\"><h3 onclick=\"showhide_toggle('5', 25190, 'Is bad debt expense tax-deductible?', 'Is bad debt expense tax-deductible?'); return false;\" aria-expanded=\"false\"><span id=\"5-toggle-25190\" class=\"sh-toggle\" data-more=\"Is bad debt expense tax-deductible?\" data-less=\"Is bad debt expense tax-deductible?\">Is bad debt expense tax-deductible?<\/span><\/h3><\/div><div id=\"5-content-25190\" class=\"sh-content 5-content sh-hide\" style=\"display: none;\">Yes, a bad debt expense may be tax-deductible. In general, it is tax-deductible when the debt becomes partly or fully worthless. However, the rule depends on the country, type of taxpayer, and accounting method.<\/p>\n<p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>What is bad debt expense? Bad Debt Expense (BDE) is the amount a company recognizes as an expense when it does not expect to collect from the customer. Thus, the company recognizes it as a collection loss. There are multiple reasons why this uncollectible accounts expense occurs; some of them are as follows: The client&hellip; <a class=\"more-link\" href=\"https:\/\/www.mooninvoice.com\/blog\/bad-debts-expense\/\">Continue reading <span class=\"screen-reader-text\">Bad debt expense: Definition, formula, examples &#038; how to calculate it<\/span><\/a><\/p>\n","protected":false},"author":12,"featured_media":30759,"comment_status":"open","ping_status":"open","sticky":false,"template":"single-custom-post.php","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1376],"tags":[],"class_list":["post-25190","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-taxes","entry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Free Invoicing, Finance Tips &amp; Insights for Small Business<\/title>\n<meta name=\"description\" content=\"Get insights on invoicing, finance, and startup tips for small businesses, freelancers, and payment at Moon Invoice Blog.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bad Debt Expense: Definition, Formula, Methods &amp; 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