Bad debt expense account is the actual expense account for bad debts while allowance for doubtful account is the provision for account in case of any bad debts occurs in future.
The percentage-of-receivables method is a way for a company to estimate its Allowance for Uncollectible Accounts and Bad Debt Expense. It is considered a "Balance Sheet Approach," because total Allowance for Uncollectible Accounts is estimated as a percent of total Accounts Receivable. Bad Debt expense then becomes the increase between the previous year's Allowance and the current year's Allowance.
The percentage-of-receivables method is a way for a company to estimate its Allowance for Uncollectible Accounts and Bad Debt Expense. It is considered a "Balance Sheet Approach," because total Allowance for Uncollectible Accounts is estimated as a percent of total Accounts Receivable. Bad Debt expense then becomes the increase between the previous year's Allowance and the current year's Allowance.
Bad Debt Expense does not appear on the balance sheet. It is only on the income statement. Allowance for Uncollectible Accounts does appear on the balance sheet.
Bad debt expense is measured indirectly, and the allowance for uncollectible accounts balance is measured directly.
Uncollectible Accounts Expense.
No while using allowance method, bad debts are charged to allowance for bad debts account rather charging the accounts receivable because accounts receivable was already charged with allowance when it was created.
Based on experience, a company will know that a certain percentage of their outstanding accounts receivable will be uncollectible, They apply this experience via a formula to approximate the dollar amount of uncollectible ,and set up an allowance for doubtful accounts (a contra-asset account) and the debit goes to bad debt expense .The formula might be as simple as 1% of total A/R or various percentages applied to an A/R aging (50% of over 90 days old +10% of over 60 day old etc.).At the end of each period, the allowance is adjusted and re calculated accordingly, up or down with the offset to bad debt expense.
Under the allowance method bad debt expenses are charged to allowance for bad debts accounts instead of profit and loss account because profit and loss account is already charged with the allowance amount created.
The direct write-off method. For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid. Before determining that an account balance is uncollectible, a company generally makes several attempts to collect the debt from the customer. Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable.
Based on experience, a company will know that a certain percentage of their outstanding accounts receivable will be uncollectible. They apply this experience via a formula to estimate the dollar amount of uncollectibles, and set up an Allowance for Doubtful Accounts (a contra-asset account) and the debit goes to Bad Debt Expense. The formula might be as simple as 1% of total A/R, or various percentages applied to an A/R aging (50% of over 90 days old + 10% of over 60 days old, etc.). At the end of each period, the Allowance is re-calculated and adjusted accordingly, up or down with the offset to Bad Debt Expense.
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An allowance for bad debt is essentially a reduction in a bank's accounts receivable. The allowance for bad debt equals the amount of the banks loans that it does not expect to collect.