How is bad debt expense recorded according to adjusting entries?

Bad debt expense is recorded as an adjusting entry for uncollectible accounts receivable, which is essential in ensuring that financial statements accurately reflect a company’s financial position. When a company estimates that certain accounts receivable will not be collected, it needs to recognize that potential loss in its financial records.

Recording bad debt expense involves creating an adjusting entry that reduces accounts receivable and recognizes an expense on the income statement, thus adhering to the matching principle. This principle mandates that expenses must be recognized in the same period as the revenues they help generate, allowing for a more accurate portrayal of profitability.

This adjusting entry does not classify bad debt expense as a liability or an asset because it is neither of those. Rather, it influences the equity section of the balance sheet through the recognition of an expense, which ultimately affects net income. By properly accounting for bad debts, the financial statements become more informative and reliable for stakeholders, providing a clearer view of the company’s actual financial health.