Does Bad Debt Expense Show in Retained Earnings?
No business owner wants bad debt on the books. Such debt is generally included in a company's cash flow statement. These types of statements are normally completed on a monthly or quarterly basis and provide an indication of how much money flows in and out of a business during the allotted time frame. Each cash flow statement will account for bad debt as an expense.
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Calculation
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Calculating the amount of bad debt is not necessarily that difficult to do because it simply involves the amount of unpaid debt owed to a company. This debt is first recognized in accounts receivable and is later listed as bad debt when the company realizes that the debt will not be paid. Bad debt is then subtracted from any net profit for the period in question to reflect the total retained earnings at the end of period.
Purpose
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The bad debt expense plays an important role in the calculation of the net income and the accounts receivable asset. The amount of bad debt expense included on the balance sheet is provided as either a percentage of the accounts receivable ending balance or as a percentage of credit sales. When expressed as a percentage of credit sales or accounts receivable, the bad debt expense is estimated. It is not provided as an exact expense.
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Cash Flow Statement
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The cash flow statement takes into account a number of different items in terms of income and expenses. Bad debt is included in the calculation of net income. This includes net profit, plus any changes or allowance for items like bad debt. These items are then adjusted by subtracting or adding any of the income or expenses deriving from cash sources. The end result is the ending cash equivalent, which then becomes the retained earnings of the company. Retained earnings are those earnings held by the company and not delivered to stockholders in the form of dividends. Because the bad debt expense affects this bottom line, it shows in the retained earnings, but only as part of the overall calculation of these earnings.
Considerations
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The retained earnings represent the profits that are retained by the company, but they do not necessarily provide an indication of a company's value. The inclusion of bad debt expenses in relation to the retained earnings merely shows what liabilities a company has in relation to its regular cash flow for operating expenses.
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References
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