Business Glossary

way of charging bad debt expense when an account receivable is actually deemed uncollectible. Thus, at the date it is certain that the customer will not be able to pay (in the most extreme instance, bankruptcy), the entry is to debit bad debt expense and credit accounts receivable. The advantage of this method is that it is based on fact rather than estimates. However, it is not accepted for financial reporting purposes because it fails to match bad debt expense against sales in the year of sale and does not show the realizable value of accounts receivable. It is the only method allowed for tax purposes (except for small banks and specified types of financial organizations).