Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.6 · INTERMEDIATE · 2 MIN

Bad Debts: When Customers Don't Pay

When a company sells on credit, some customers will never pay. GAAP requires estimating these losses upfront using the Allowance Method, rather than waiting for default.

Quiz · 5 questions ↓
§ 01
Bad Debt Expense = Receivables x Estimated Default Rate
§ 02

Watch for companies that suddenly lower their bad debt estimates to boost earnings. If receivables are growing faster than revenue, collection problems may be hiding.

§ 03

Days Sales Outstanding (DSO) is the investor's check on receivables quality. Rising DSO means it takes longer to collect, which may signal deteriorating customer creditworthiness.

§ 04
Company's accounts receivable ages: 0-30 days $50M, 31-60 days $20M, 61-90 days $10M, 90+ days $15M. Last year the bad-debt allowance was 3% of total A/R. What's a disciplined current allowance?
Five questions · AI feedback

Sit with the ideas.

AFDA had a beginning balance of $45,000. During the year, the company recorded bad debt expense and wrote off $12,000 of uncollectible accounts. The ending AFDA balance is $51,000. What was bad debt expense for the year?

Why:

Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay— reading now
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
See it on a real ticker →