Difference Between Bad Debt Expense And Allowance For Doubtful Accounts

Bad Debts Expense is the actual bad debts that is sure and certain and it is not recovered from customers. It is not an estimation. The Bad Debts Expense Journal Entry is:

                                          Bad Debts Expense a/c  XXX

                                                                             Accounts Receivable a/c  XXX

(Amount Due From Customer Becomes Bad Debts Expense)

 Whereas Allowance for Doubtful Accounts is an estimation of Bad Debts based on the Percentage of Sales Method (Income Statement-Approach) or the Percentage of Accounts Receivable (Balance Sheet-Approach) that will probably not be recovered from customers in future. For the Allowance for Doubtful Accounts, the Journal Entry is as shown below:

Uncollectible Accounts Expense / Doubtful Debts a/c    XXX

                                                                        Allowance For Doubtful Accounts a/c    XXX

(Estimation For Bad Debts Is Created For The Period)

2. Bad Debts is an Expense and it is closed and recorded under operating Expenses in Income Statement while Allowance for Doubtful Accounts is a Contra Asset Account and it is deducted from ending balance of Accounts Receivable on Balance Sheet at the end of accounting period.

3. The Normal Balance of Bad Debts is Debit. When it incurs, then we debit it and when it is closed we credit. However, the favourable or positive or Normal Balance of Allowance for Doubtful Accounts is Credit when it is created we credit it and when we close it or on writing off Uncollectible Accounts or Accounts Receivable, we debit it.

So, Bad Debts Expense is an actual loss to the company while allowance for doubtful accounts is just an estimation that probably may work or not i.e., whether the amount of uncollectible accounts will be received or not.