how to calculate bad debt expense
there are two different methods used to recognize bad debt expense using the direct write off method uncollectible accounts are written off directly to expense as they become uncollectible on the other hand the allowance method accrues an estimate that gets continually revised the direct write off method is used in the u s for income tax purposes however while the direct write off method records the exact amount of uncollectible accounts it fails to uphold the matching principle used in accrual accounting and generally accepted accounting principles gaap the matching principle requires that expenses be matched to related revenues in the same accounting period in which the revenue transaction occurs the major problem with the direct write off is the unpredictability of when the expense may occur consider a company that has a single customer that has a material amount of pending accounts receivable under the direct write off method 100 of the expense would be recognized not only during a period that can t be predicted but also not during the period of the sale the entries to post bad debt using the direct write off method result in a debit to bad debt expense and a credit to accounts receivable there is no allowance and only one entry needs to be posted for the entry receivable to be written off the allowance method is an accounting technique that enables companies to take anticipated losses into consideration in its financial statements to limit overstatement of potential income to avoid an account overstatement a company will estimate how much of its receivables from current period sales that it expects will be delinquent because no significant period of time has passed since the sale a company does not know which exact accounts receivable will be paid and which will default so an allowance for doubtful accounts is established based on an anticipated estimated figure a company will debit bad debts expense and credit this allowance account the allowance for doubtful accounts is a contra asset account that nets against accounts receivable which means that it reduces the total value of receivables when both balances are listed on the balance sheet this allowance can accumulate across accounting periods and may be adjusted based on the balance in the account 