What is bad debt expense?

Bad debt expense is how uncollectable receivables show up on the P&L. When a business determines that a customer is unlikely to pay — the customer has gone out of business, disputed the invoice and prevailed, or simply gone dark — it records that loss as an expense. The accounting entry debits bad debt expense and credits the allowance for doubtful accounts, which reduces net receivables on the balance sheet.

There are two ways to calculate it. The direct write-off method records the expense only when a specific invoice is confirmed uncollectable. The allowance method estimates expected losses each period based on historical write-off rates and aging — the more accurate approach for businesses with meaningful AR balances, and the one GAAP requires for most companies.

For small businesses, bad debt expense is often invisible until year-end, when the accountant makes an adjustment. Running an aging report monthly and following up on the 30–60 day bucket proactively is the cheapest way to reduce the number that ultimately gets expensed.