Bad Debt Expense is a decision made by the owner that decided that a customer is not going to pay for their services or products.
Usually when a sale occurs. Customer have an agreement with the owner to pay for the services or product by certain amount of time. Some payment can be due on the same day, while, other can be paid in 15, 30, or 60 days as an example.
When services or product have been completed by the business owner. The owner records the sale on the profit and loss statement and records money owed on account receivable on the balance sheet.
Once attempts have been made to collect and issue arises with the customer on payment. The accounts receivable is deducted and increase to allowance for doubtful account on the balance sheet to show that there is a risk that money might not be collected, but still have a possibility that it might be paid.
Once you realized that the customer is not going to pay for services or product. You would deduct the allowance for doubtful account from the balance and increase bad debt expense on the profit and lost statement to show a loss in operation for work no paid.
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