when a company makes a credit sale it books a credit to revenue and a debit to an account receivable the problem with this accounts receivable balance is there is no guarantee the company will collect the payment for many different reasons a company may be entitled to receiving money for a credit sale but may never actually receive those funds 
because the company may not actually receive all accounts receivable amounts accounting rules requires a company to estimate the amount it may not be able to collect this amount must then be recorded as a reduction against net income because even though revenue had been booked it never materialized into cash this expense is called bad debt expenses and they are generally classified as sales and general administrative expense though part of an entry for bad debt expense resides on the balance sheet bad debt expense is posted to the income statement recognizing bad debts leads to an offsetting reduction to accounts receivable on the balance sheet though businesses retain the right to collect funds should the circumstances change 