Bad debts expense is an expense account to record uncollectible receivables. Individuals may be laid off from their jobs or faced with unexpected hospital bills. Companies record credit losses as debit to bad debts expense (or uncollectible accounts expense). Such losses are a normal and necessary risk of doing business on a credit basis.
Two methods are used in accounting for uncollectible accounts:
(1) the direct write-off method and
(2) the allowance method.