Bad debt expense refers to the financial loss a company incurs when it cannot collect money owed from its customers. This typically happens when accounts receivable become uncollectible, meaning the company does not expect to receive payment. Bad debt expense is usually categorized as either an administrative or selling expense and may also be known as uncollectible accounts expense.
In legal practice, bad debt expense is relevant primarily in the areas of accounting and finance. Businesses must accurately report their financial status, including any losses from bad debts, for tax purposes and financial reporting. Users may manage related forms and procedures, such as documenting bad debts and preparing financial statements, using templates available from US Legal Forms.
Here are a couple of examples of abatement:
Example 1: A furniture store sells a couch on credit. After several months of attempts to collect payment, the store determines that the customer is unable to pay. The store records a bad debt expense to reflect this loss.
Example 2: A small business provides services to a client who later declares bankruptcy, making it impossible to collect the outstanding balance. The business will record this amount as bad debt expense in its financial records.
| Term | Definition | Difference |
|---|---|---|
| Bad Debt Expense | Loss incurred from uncollectible accounts receivable. | Focuses specifically on uncollectible debts. |
| Allowance for Doubtful Accounts | A contra asset account that estimates uncollectible accounts. | Represents a reserve rather than an expense. |
| Write-off | A formal recognition that a debt is uncollectible. | Refers to the action taken after determining a debt is bad. |
If you find yourself dealing with bad debt expense, it is important to document all collection efforts. You can use legal templates from US Legal Forms to help manage your accounts receivable and track bad debts. If the situation is complex or involves significant amounts, consider consulting a financial advisor or legal professional for tailored advice.
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Bad debt expense is the cost incurred when a business cannot collect money owed from customers.