The equation for bad debt expense is calculated using the allowance method and typically follows this formula: Bad Debt Expense = (Credit Sales * Bad Debt Percentage) + Beginning Allowance for Doubtful Accounts – Ending Allowance for Doubtful Accounts. This formula estimates the portion of credit sales that is expected to become uncollectible based on historical data and adjusts the allowance for doubtful accounts accordingly. The resulting expense reflects the amount set aside to cover potential losses from customers defaulting on their payments.
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Emagia is a leading provider of AI-powered Order-to-Cash (O2C) automation platform that modernizes finance operations for midsize to large global businesses. Many global businesses and shared service centers use Emagia’s Autonomous O2C to transform to digital world-class operations in credit, invoicing and payments, receivables, collections, deductions, cash application and cash forecasting. Emagia solutions improve their customers DSO, cash flow, credit risk, operational cost, compliance and profitability.
