Bad Debt Expense

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Definition of 'Bad Debt Expense'

Bad debt expense is an expense that a company incurs when it is unable to collect a debt that is due. This can happen for a variety of reasons, such as the customer becoming insolvent or simply refusing to pay. Bad debt expense is recorded on the income statement as a deduction from revenue.

There are two main types of bad debt:

* **Uncollectible accounts:** These are debts that are unlikely to be collected, such as those owed by customers who have gone out of business or who are deceased.
* **Doubtful accounts:** These are debts that are not yet considered uncollectible, but there is some doubt that they will be paid.

When a company determines that a debt is uncollectible, it will write off the amount of the debt as a bad debt expense. This means that the company will no longer expect to receive payment for the debt, and it will reduce its assets by the amount of the debt.

Bad debt expense can have a significant impact on a company's financial results. If a company has a lot of bad debt, it can reduce its net income and its ability to pay its debts. This can make it more difficult for the company to raise capital or attract new investors.

There are a number of ways to manage bad debt risk. One way is to carefully screen potential customers before extending credit. Another way is to require customers to make a down payment or provide collateral. Companies can also purchase insurance to protect themselves against bad debt losses.

Bad debt expense is an important concept for understanding how businesses manage their finances. By understanding the different types of bad debt and how they are accounted for, businesses can better manage their risk and ensure that they are able to collect the debts that they are owed.

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