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What are the effects of bad debt expenses on the income statement and the balance sheet?


What are the effects of bad debt expenses on the income statement and the balance sheet?
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Answer #1
  • Effect of bad Debt Expense on Income Statement

Bad Debt expenses as the name suggests is an item of Expense that is taken to Income statement. This expenses increases the total expenses and hence the puts pressure on Revenues and Net Income.

The more the bad debt expense, the lesser will be the Net Income, the less the bad debt expense, the more will be the Net Income.

  • Effect of Bad Debt expense on Balance Sheet

One effect of Bad Debt expense is that it decreases Net Income which results in decrease of Retained Earning Balance in Balance Sheet.

If the company uses allowance method, in the balance sheet, the bad debt expense will increase the credit balance of Allowances for Doubtful account.

If company uses direct write off method, the bad debt expense will decrease the balance of Accounts receivables on Asset side of the Balance Sheet,

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