What is bad debt expense?

Bad debt expense specifically refers to the cost recognized in accounting when a company estimates that certain accounts receivable will not be collected. This is often associated with credit sales where customers have purchased products or services but are unable to pay their debts. When assessing bad debt expense, companies must evaluate historical data and current conditions to estimate the potential collectibility of their receivables.

This expense is crucial for accurately reflecting the financial health of a business; recognizing bad debts allows companies to match expenses to the revenues generated during the same period, adhering to the accrual basis of accounting. By doing so, businesses can present a more accurate picture of their profitability and maintain realistic asset valuations on their balance sheets.

The other choices do not accurately represent the nature of bad debt expense. Suggesting revenue lost or income from credit sales does not capture the essence of an expense related to uncollectible amounts, which is directly linked to the company's inability to collect certain owed debts. Similarly, references to customer discounts pertain to different financial transactions that do not involve the estimation of uncollectible accounts.