Income Statement Example With Bad Debt Expense

Busi 1310 chapter 8 handout example two 2a prepare the journal entries for these two transactions using the allowance method.

Income statement example with bad debt expense. Determined that a receivable from broghan company for 700 would not be collectible. Example of bad debt expense let s assume that company xyz sells 1 000 000 worth of goods to 10 different customers. Accordingly they enter a bad debt expense of 3 000 on the company s monthly financial statement and add the same amount to the allowance for doubtful accounts on the balance sheet. This item appears typically under operating expenses below the gross profit line.

Company xyz records 1 000 000 in revenue on its income statement and 1 000 000 in accounts receivable on the balance sheet we are assuming the customers have 60 days to pay. Bad debt expense equation helps in obtaining a true and fair view of financial statements as net profit and debtors are correctly estimated by identifying bad and doubtful debts. Understanding bad debt expense bad debt expenses are generally classified as a sales and general administrative expense and are found on the income statement recognizing bad debts leads to an. As a result bad debt expense from a write off lowers bottom line net.

This method is based on an evaluation of the collectibility of accounts receivable. The portion that a company believes is uncollectible is what is called bad debt expense the. The income statement may also include a line item for bad debt expense. The bad debt expense appears in a line item in the income statement within the operating expenses section in the lower half of the statement.

First let s determine what the term bad debt means. Hence making journal entry of bad debt. With both methods the bad debt expense needs to record in the income statement by a different time. For the income statement using the allowance method helps the company to have better matching of the period which the revenue earns and the period which bad debt expense incurs.

As an example of the allowance method abc international records 1 000 000 of credit sales in the most recent month. Sometimes at the end of the fiscal period when a company goes to prepare its financial statements it needs to determine what portion of its receivables is collectible. Accounts receivable aging method.