What is a bad debt?

A bad debt is a specific account receivable or note receivable that will not be collected.

There are two ways to record a bad debt, which are:

1. Direct write-off method. If you only reduce accounts receivable when there is a specific, recognizable bad debt, then debit the Bad Debt expense for the amount of the write off, and credit the accounts receivable asset account for the same amount. 
2. Allowance method. If you charge an estimated amount of accounts receivable to bad debt expense in the same period when you record related revenue, then debit the Bad Debt expense for the amount of the estimated write-off, and credit the Allowance for Doubtful Accounts contra account for the same amount.

The direct write-off method is not the best approach, because the charge to expense may occur several months after you recorded the related revenue, so there is no matching of revenue and expense within the same period (see the matching principle).The allowance method has the advantage of matching expected bad debts to revenues, even if you don't know exactly which accounts receivable will not be collectible.

Related Topics

Can the bad debt expense be negative?
What is a bad debt provision?
What is the allowance for doubtful accounts?
What is the difference between bad debt and doubtful debt?
What is the provision for doubtful debts?