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- Bad Debt Write Offs; Measuring Bad Debts; Bad Debts as a Measurement of Credit Department Effectiveness
- Bad Debt Expense
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- Bad Debt Write Offs; Measuring Bad Debts; Bad Debts as a Measurement of Credit Department Effectiveness
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Bad Debt Expense
On the income statement, a bad debt expense is an expense representing the estimate of uncollectability of accounts receivable. Unfortunately, a bad debt write off is not consistent with the Matching Principle (discussed and explained elsewhere in the Encyclopedia of Credit). Most companies create a provision or an allowance for doubtful accounts. IF the decision to write off an uncollectable balance is made in the same fiscal year and the year in which the sale was made and the debt was incurred, the loss can be expensed in a Direct Write Off. However, if it happens that the decision to write off the uncollected balance will not occur in the year in which the sale was made and the debt was incurred, then a Provision for Doubtful Accounts needs to be created to be used to clear these doubtful accounts once the decision is made that the debt has been uncollectable.
The challenge for the typical credit department is to determine when a debt is actually uncollectible. Before a write off can occur, there must be some evidence of uncollectibility. That evidence could be the passage of time. A bankruptcy by the debtor is strong justification for a write off. Also, the disappearance of the debtor, a bulk sale of assets, appointing a trustee or the destruction of the collateral can each be justification for a bad debt write off.
© 2010 by Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook."