Uncollectible accounts expense is the charge made to the books when a customer defaults on a payment. This expense can be recognized when it is certain that a customer will not pay. A more conservative approach is to charge an estimated amount to expense when a sale is made; doing so matches the expense to the related sale within the same reporting period, even though the precise nature of the default is not yet known.

Uncollectible accounts expense is also known as bad debt expense.

Methods for Estimating Uncollectible Expense

The two main methods for estimating uncollectible expense are the percentage of sales method and the aging of accounts receivable method, which are described below.

Percentage of Sales Method

The percentage of sales method estimates uncollectible accounts expense based on a fixed percentage of total credit sales for a period. This approach assumes that a consistent portion of every sale will eventually become uncollectible, based on historical experience. After calculating the estimated amount, the company records it as an expense on the income statement, with an offsetting credit to the allowance for doubtful accounts. This method emphasizes matching bad debt expense with the revenues that generated it within the same accounting period.

Aging of Accounts Receivable Method

The aging of accounts receivable method analyzes outstanding receivables based on how long they have been unpaid. Older receivables are considered more likely to be uncollectible, so higher percentages are applied to older accounts. The method calculates an estimated ending balance for the allowance for doubtful accounts, rather than directly estimating the expense. The uncollectible accounts expense is then the amount needed to adjust the existing allowance to the required ending balance.

Presentation of Uncollectible Accounts Expense

The uncollectible accounts expense normally appears within the operating expenses section of an income statement, though it is most commonly presented as Bad Debt Expense. The presentation appears in the following income statement exhibit.