What is Bad Debt Expense in Business?

Finding your way through the ins and outs of owning your own business can be difficult, but extremely rewarding! Along the way, you will not only find new and interesting ways to create profits, but you also learn a lot about business expenses and debt. Bad debt expense in business is one of those things that can hurt your business, but you may not have any idea what it is until it is too late!

So what exactly is bad debt expense? Much like learning how to calculate the cost of debt, or even learning how to file your taxes properly, bad debt expense is a part of doing business. In order to make that clear to you, here is a breakdown of examples, as well as steps you can take as a business owner to avoid it!

Defining Bad Debt Expense

Unless you’re an accountant or have been in business for years, defining bad debt expense can sound intimidating. However, once you understand exactly what it is, and how it can affect your business, then it’s quite simple!

Defining Bad Debt Expenses

Your company’s accounts receivable will be where you should be looking for bad debts expense. It can also be called “doubtful accounts expense”, or even “uncollectable accounts expense”. This means that your business has provided goods or services to a customer on credit. Unfortunately, when the time came to collect on that credit, the customer did not pay what was owed.

However, this doesn’t mean you get to just go after the customer for the amount owed legally. Bad debt expense is basically when the customer is no longer able to pay. This is generally due to things like bankruptcy, going out of business, or other unfortunate issues.

How Do You Account for Bad Debt Expense?

Finding how to both report, file and account for bad debt expense in your business finances doesn’t have to be tricky. They are typically sorted as either general administrative expenses, or even as a sales expense. However, bad debt expense does create an obvious obstacle for your accounts receivable!

In addition to losing goods and/or services, your accounts receivable will also be out of balance. Although businesses can always retain the right to collect the amount due if the customer’s financial situation changes, your business is in the red for that account for now.

Two Main Ways to Recognize Bad Debt Expense

Within your company’s financial records, there are two primary ways to acknowledge bad debt expense:

  • Allowance Method: This means that your company will take steps to predict this type of expense before it happens. The losses can be calculated into expected income for the year. Therefore, a company can avoid an account overstatement. This can be calculated from previous losses of this kind from the company, as well as from other companies in the same field.
  • Direct Write-Off: This is a method of dealing with bad debt expense that is extremely straight forward. Instead of calculating the non-payments into their overall budgets, businesses can write off the expense. All in all, this means that uncollectible funds are written off as a base expense by the business. However, this method can lead to more difficult accounting in the future for many different reasons.

Within your business, how you deal with bad debt expense is completely up to you. Not to mention what is best for the company as a whole.

write-off debt

Avoidance and Modern Business

All things considered, it’s extremely difficult to avoid bad debt expense in the modern business world. When dealing with many different clients, or even different companies, it’s extremely difficult to predict their successes or failures. That being said, there are a few ways to avoid this expense altogether.

As bad debt expense only occurs when dealing with credit for customers, you can simply avoid this expense by not dealing in credit. Simply allow for payments to be made upon receipt of services, or goods.

Because businesses allow customers to receive goods or services on credit, they run the risk of this debt becoming uncollectable! However, this isn’t always a black and white, clear picture kind of decision to make. There are a lot of reasons why you may allow a customer to receive credit from your business, as well as whether or not you aggressively collect those debts.  

Finding Your Way Through Bad Debt Expense

Altogether, owning a business is filled with many ups and downs. From learning how to deal with people one on one, as well as wading your way through corporate takeovers, finding your way through bad debt expense doesn’t have to be a challenge! You can find great ways to collect debts, to deal with clients, but some expenses can’t be avoided.

Overall, how you deal with your bad debt expense is up to you and your business. Whether you prefer the direct write-off method, the allowance method, or trying your hardest to avoid it altogether, there are a variety of paths! However, you can’t predict how well, or how poorly your customers will do. Bad debt expense is simply one of the many, many costs of doing business in the modern, credit-driven world.

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What to Consider Before Getting Your First Credit Card

Getting your first credit card means setting off on a road of financial freedoms, as well as taking on a huge responsibility. When researching credit cards, there are a lot of different things to consider! From interest rates, to payments, as well as all of the reasons to have one, you should keep in mind a lot of different things.

Why are You Getting a Credit Card?

All in all, getting a credit card is a major life decision. How you use it and manage the payments can greatly affect you in the future! Before you get your first card, you should really contemplate all of the reasons why you are getting it. You can also look into why you should get a card to begin with!

Why are You Getting a Credit Card?

You Need it for Purchases

If you’ve traveled in the last few years, or tried to make a large purchase, you will find more and more things require a credit! Not only that, but you can’t even make the purchase without one! Here are a few things that you will likely need a credit card for:  

  • Building a Credit History. In order to build a credit history beyond student loans and mortgages, a credit card is a good idea. This will help you to make large purchases down the road. All things considered, houses, cars, boats, condos, anything having to do a credit check beforehand will lead to you needing a good credit score.
  • Renting a Car. Not only can you travel using credit card points, but you can also use a card to rent a car. It’s actually a requirement for most major rental car companies. Because companies don’t want to risk their assets, if you damage a rental car, they need you to pay. A card is a great way to ensure they get their money.
  • Reservations for Hotels, Cruises, Vacations, etc. Although you can make a lot of reservations with a debit card, there are some companies that only make reservations with a credit card. Not only can you not book the destination packages, but you may not be able reserve the holiday of your dreams to begin with!

Altogether, there are more and more purchases that you can only make with a credit card.

Credit Card Rewards

One of the reasons you may be looking into your first credit card may be to reap the widely advertised benefits. You can get discounts at places you regularly buy goods from, or even services provided. Not to mention the wide array of cash rebates, travel rewards, merchandise perks, gift cards, and so much more that credit card companies offer! All things considered, it’s not a BAD reason to get a credit card and build a credit score.

First Credit Card Need to Know

Before you get you first credit card, you should know how you’re going to pay it off, all of your personal limitations with spending, as well as how you’re going to use it! Like knowing what happens to your debt when you die, you need to know all the different details about your own spending and debt.

Whether you simply use it to fill your gas tank, to get groceries, or even to buy plane tickets, you should first know whether you can pay your minimum monthly payment. Once you know this information, you can get down to the nitty gritty of what you need to know before getting your first credit card.

How Do Credit Cards Work?

One of the most important factors to consider when getting credit cards is how they actually work! Having a credit card is like taking out several tiny loans. First, you’ll get approved for the card. Secondly, you’ll begin to make purchases with said card. Thirdly, you’ll repay the outstanding balance within your thirty-day period to avoid interest. Building your credit history can be uncomplicated, inexpensive, as well as rewarding!

Credit Cards Interest Rates

There do come times when paying off your entire balance within the thirty-day period is, in a word, impossible. Because your first card will be a new experience, it’s important to understand interest rates before you sign up!

Credit Cards Interest Rates

Interest rates are calculated according to your unpaid balance, or your average daily balance after your payment is due. Next, this figure is multiplied by the card company’s annual percentage rate (APR), as well as the number of days in the month, and other figures in your contract. Finally, you have your monthly interest rate that accrues if you continue to let your balance go unpaid.

It’s good to know exactly how this works in detail. If you have questions, or even need someone to explain it to you in more thorough detail, you can always contact the credit companies directly. This makes it easier to understand what may happen if you can’t pay the entire balance each month, as well as how you can help avoid paying the rates to begin with!

Knowing the Ins and Outs of Your First Credit Card

There are so many things to consider when researching getting your first credit card, perhaps of many. Whether you’re looking into finding the interest rates, knowing how you can pay off the minimum monthly payment, as well as finding the right rewards, there are a lot of factors! Using these helpful points, you can confidently sign up for your first credit card and start spending wisely.

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