How to calculate bad debt expense
Bad debt percentage = amount written off / credit sales for the period x 100. $4,200 written off against $420,000 of credit sales is 1.00%.
Bad debt expense for the next period, by the percentage of sales method, is that rate times the credit sales you expect: 1.00% of $420,000 is $4,200. Put next period's sales in the last box and the calculator shows the estimate.
Two denominators, two different questions
Bad debt as a share of credit sales tells you how much of what you sell you never collect. It is the number to track over time, because it is comparable between periods of different size.
Bad debt as a share of receivables tells you how risky the balance you are carrying right now is. It is the number to look at before deciding whether to extend more credit to somebody.
Bad debt expense and the allowance for doubtful accounts
The allowance for doubtful accounts is an estimate of the receivables you expect not to collect, set aside before any specific invoice goes bad. It is a contra-asset: it carries a credit balance and is subtracted from accounts receivable on the balance sheet. Bad debt expense is the charge on the profit and loss that builds it up.
- Percentage of sales: bad debt expense is a set rate of the period's credit sales.
- Percentage of receivables: the allowance balance is a set rate of closing receivables, and the expense is whatever tops it up to that level.
- Aging method: a higher rate for each older bucket of the aging report, added up.
The journal entries: to record the estimate, debit bad debt expense and credit the allowance. When a specific invoice is written off, debit the allowance and credit accounts receivable, so the write-off itself does not touch profit a second time. Small businesses that skip the allowance use the direct write-off method instead, and debit bad debt expense only when an invoice is given up. Take advice on which your accounts and your tax return need.
The replacement cost is the point
A write-off is not a loss of revenue, it is a loss of profit, and profit is the expensive kind. At a 20% net margin, $4,200 written off needs $21,000 of new work to replace. At 10% it needs $42,000. On thin margins a single bad debt can wipe out the profit from a month of good work, which is the argument for chasing early rather than politely.
Put next to the cost of sending a statement on a fixed day each month, or of getting the purchase order number onto the invoice so it can be matched, the arithmetic makes itself.
What to compare your figure with
No published average fits every trade, so the most useful comparison is your own rate over time, and your own margin. A rate that rises two periods in a row is worth acting on whatever the level. The aging report tells you what kind of problem it is: risk concentrated in one large old debt is a credit problem, risk spread across many small overdue invoices is a process problem.
For scale, Atradius found US businesses wrote off 5% of long overdue B2B invoices as uncollectable in its 2025 survey. That and other sourced figures are on the late payment statistics page.
Related calculators
- AR aging calculatorThe balance owed, split by how overdue it is
- CEI calculatorCollection effectiveness index, scored out of 100
- DSO calculatorDays sales outstanding, and what shortening it releases
Questions people ask
How do you calculate bad debt percentage?
Divide the amount written off in the period by credit sales for that period and multiply by 100. Dividing by closing receivables instead answers a different question, about the risk in the balance you hold now.
How do you calculate bad debt expense?
By the percentage of sales method, multiply the period's credit sales by your expected bad debt rate. By the percentage of receivables or aging method, work out the allowance you need on closing receivables, and the expense is the amount that brings the allowance up to it.
What is a normal bad debt percentage?
No published figure fits every trade, so compare with your own history and your margin. A rate that keeps rising points at either the credit decision or the chasing, and the aging report shows which.
Why does the calculator ask for my margin?
Because a write-off costs profit, not revenue. Showing the sales needed to replace it at your own margin is the only version of the number that reflects what it actually cost you.
What is the allowance for doubtful accounts?
An estimate of receivables you expect not to collect, set aside before any specific invoice goes bad. Many businesses base it on their historical bad debt percentage, which is the figure this page produces.
Is the allowance for doubtful accounts an asset?
It is a contra-asset account. It has a credit balance and is shown as a deduction from accounts receivable, so the balance sheet shows what you expect to collect rather than the gross amount invoiced.
What is the journal entry for bad debt expense?
Under the allowance method, debit bad debt expense and credit the allowance for doubtful accounts. When an invoice is later written off, debit the allowance and credit accounts receivable.
What is the difference between the allowance method and the direct write-off method?
The allowance method estimates bad debts in the period the sale is made. The direct write-off method records the expense only when a specific invoice is given up, which is simpler but can land the cost in a different period from the sale.
When should I write an invoice off?
There is no universal rule, and the tax treatment varies by country, so take advice on the accounting. Commercially, most small businesses stop spending time on a debt long after the point where the time costs more than the debt.
Does a credit note count as bad debt?
No. A credit note cancels something you agreed was not owed. Bad debt is money you are owed and have given up collecting. Keeping them separate matters, because one is a pricing or quality signal and the other is a credit signal.