How to Calculate Ending Bad Debt Expenses
Your company has a bad debt when you sell services or merchandise to a customer who does not pay his bill. The amount the customer does not pay equals your bad debt expense. Companies generally expect to have some bad debt each year, as most businesses have some customers who do not pay invoices, or do not pay invoices timely. Business owners use bad debt expense balances to make decisions concerning additional account collections and to analyze current terms for extending credit to customers.
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Instructions
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Calculate the balances from your accounts receivable invoices for the period you wish to examine. Invoices show the amount you charge customers for services you provide or items you sell. When customers purchase from your business on credit, they receive services and pay later. These transactions are accounts receivable transactions. Do not include invoices that are paid in full by the customer at the time of service or purchase.
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Determine the grace period for payments. Many companies give customers 30 days to pay invoices. Do not count unpaid invoices as bad debt until the grace period expires. For example, if your business grants a 30-day grace period on accounts receivable payments, and you bill a customer in May, do not examine the invoice for bad debt until July. Because invoices to customers are sent on various dates, and payments from customers are received on various dates, most companies use a monthly system to calculate bad debt expense instead of a daily system.
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Subtract the total accounts receivable payments you receive during the billing period from the total accounts receivable invoice balance. The result is your ending bad debt expense for the period. If you have an existing balance in a bad debt expense account, add the new ending bad debt to the existing balance. Otherwise, roll the new ending bad debt balance forward to add future bad debt balances. Your total bad debt expense is subtracted from your company's gross income at the end of the year.
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