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Bad debt expense8/1/2023 ![]() ![]() Often, estimated bad debt is referred to as doubtful debt. It’s recorded separately to keep the balance sheet clean and organized. This estimate is called the bad debt provision or bad debt allowance and is recorded in a contra asset account to the balance sheet called the allowance for credit losses, allowance for bad debts, or allowance for doubtful accounts. ![]() There will likely be customers who can’t pay their debts back.īecause you can’t be sure which loans, or what percentage of a loan, will translate into bad debt, the accounting method for recording bad debt starts with an estimate. ![]() For businesses that provide loans and credit to customers, bad debt is normal and expected. DOWNLOAD NOWīad debt is the term used for any loans or outstanding balances that a business deems uncollectible. Here’s how to account for doubtful and bad debt on financial statements, along with a primer on bad debt provision and why it’s important today.įree E-Book: A Manager's Guide to Finance & AccountingĪccess your free e-book today. Planning for this possibility by estimating the amount of uncollectible loans is called bad debt provision and can enable companies to measure, communicate, and prepare for financial losses. In this scenario, what happens if the customer can’t pay back the loan they borrowed plus the interest they’ve accrued? Your company has what is called “bad debt.”īad debt is a reality for businesses that provide credit to customers, such as banks and insurance companies. This is called credit risk and is typically reflected in the loan's interest rate the higher the risk level, the higher the interest rate. When you loan money to someone, there’s an inherent risk they won’t pay it back. Imagine you work at a company that provides credit to its customers. ![]()
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