How to Calculate Bad Debt Expense

Calculate bad debt expense by multiplying the company’s credit sales by the estimated percentage of uncollectible accounts.

  1. Percentage of Sales Method: Calculate bad debt expense by multiplying the company’s net credit sales for a given period with an estimated bad debt percentage. This percentage is derived from historical data or industry benchmarks, representing potential losses from uncollectible accounts.
  2. Aging of Accounts Receivable Method: Employ an aging schedule to classify outstanding accounts receivable by their duration. Assign varying percentages of uncollectibility based on past collection trends to each category. Multiply the amounts in each category by their respective bad debt percentages and sum them to estimate the bad debt expense.
  3. Direct Write-Off Method (Not Recommended): This method is used when a specific customer’s account is confirmed as uncollectible and is written off. However, it doesn’t align with generally accepted accounting principles as it doesn’t match expenses with corresponding revenues.

Remember, the “Allowance for Doubtful Accounts” is a contra-asset account offsetting accounts receivable on the balance sheet. It signifies the anticipated uncollectible amount, aiming to accurately portray potential bad debt losses while following accounting norms. The choice of calculation method depends on historical data, industry practices, and accounting policies, often advised through consultation with financial experts.

Reimagine Your Order-To-Cash with AI
Touchless Receivables. Frictionless Payments.

credit automation software

Credit Risk

Learn More
Receivables

Receivables

Learn More
Collections

Collections

Learn More
Deductions

Deductions

Learn More
Cash Application

Cash Application

Learn More
Customer EIPP

Customer EIPP

Learn More

Bringing the Trifecta Power - Automation, Analytics, AI

Gia

GiaGPT

Generative AI for Finance

Gia

Gia AI

Digital Finance Assistant

GiaDocs AI

GiaDocs AI

Intelligent Document Processing

Order-To-Cash

Order-To-Cash

Intelligent Analytics

Recommended Digital Assets for You

Suggested Resources

Digital World-class Leaders Use Emagia Order-to-Cash

Case study

Driving world-class efficiency in global accounts receivables operations spanning across
90
Countries
1000
Customers
170+
Connected Banks

Case study

Achieving world-class digital Order-to-Cash performance globally in 15 months
$4B
In Receivables
44
Countries
>95%
cash app rates

Case study

Cali Bamboo Boosts Digital Credit Decisions with Emagia

How a green building materials company automated the tedious task of manual credit management, and accelerated customer onboarding using the Emagia credit application solution.

Case study

Digital Credit Transformation for American Heart Association

How Emagia empowered one of the world’s largest voluntary organizations accelerate customer credit approvals and onboarding time, while reducing manual efforts in credit processing.

Add AI to Your Order-to-Cash Process

JD EDwards logo

AR Automation for JD EDwards

SAP logo

AR Automation for SAP

Oracle logo

AR Automation for Oracle

NetSuite Logo

AR Automation for NetSuite

PeopleSoft logo

AR Automation for PeopleSoft

MS Dynamics logo

AR Automation for MS Dynamics

Need Guidance?

Talk to Our O2C Transformation Experts

No Obligation Whatsoever

Emagia is a leading provider of AI-powered Order-to-Cash (O2C) automation platform that modernizes finance operations for midsize to large global businesses. Many global businesses and shared service centers use Emagia’s Enterprise Receivables Management System to transform to digital world-class operations in credit, invoicing and payments, receivables, collections, deductions, cash application and cash forecasting. Emagia solutions improve their customers DSO, cash flow, credit risk, operational cost, compliance and profitability.

Request a Demo
×