Bad Debt Expense
  
Bad debt expense is the loss the business has when it doesn't collect on goods or services it sold. This is included as a reduction on the accounts receivable sheet.
There are two ways to calculate and record it. The first is the direct write off method, where the business writes off the amount owed as soon as it becomes uncollectible. The other is allowance method. This method records an estimated dollar amount that was lost in the period.
Related or Semi-related Video
![Finance: What is the Student Loan Crisis?](https://media1.shmoop.com/video/thumbnails/COURSE.FINANCE.180_770x433.jpg)
Finance: What is the Student Loan Crisis...24 Views
Finance allah shmoop what is the student loan crisis Well
simply put more and more and more students have no
hope of paying back the loans they've borrowed to go
to college Pick a middle of the road priced university
good school but state money is fast evaporating so tuition
and other costs are midway to that of the elite
private institutions like harvard and stanford On those guys tuition
twenty grand a year times for room and board Fifteen
grand a year times four books travel another five grand
a year times for two green unnecessarily priceless add it
all up and the total cost to go to a
middle of the road price university these days all in
while somewhere around one hundred and sixty grand ouch Some
of the money can be paid back via summer work
but it's not easy to find those jobs anymore right
Certainly in california and a lot of students grumpily have
tto live in their old rooms back with parents desperately
hustling artisanal toothbrushes on etsy or moonlighting as a driver
for uber or lift if you like tips But let's
say ten grand gets paid back through summer work each
Summer the interest cost on student loans is high Yeah
Why Well students or a bad risk How would you
like to loan money to a student Tons of them
don't pay back the loans they promised to pay back
when they signed the paperwork taking them out in the
first place Five percent interest rate ten percent Twenty percent
what's the right number Yeah who knows Well all that's
clear is that some very large number of student loans
will default and then cost a fortune in lawyer bills
to collect if they ever get collected at all How
would you feel being the bank who loaned all those
bad loans to people who majored in french literature and
couldn't get a job Well is this fair to the
non dead beat students who actually did pay back the
loans they took out They're not responsible for those students
who were unable to find gainful employment in their field
study or those who are teo you know preoccupied even
bother paying loans back in the first place Regardless all
the goody goodies air left the riding the same skyrocketing
interest rates is everyone else Why Because you have to
Charge the non deadbeats mohr interest to pay for the
deadbeats who didn't pay back their loans Is that fair
No not at all Is it really life You bet
isn't that one of the first lessons they teach you
in college that life isn't fair Well so figure ten
percent on student loans and here's where things get brutal
ten percent interest Ah history and english major graduates from
whatever university with one hundred fifty grand in debt just
saying they owe fifteen grand a year just in interest
and the loan packages require them to pay down the
loan and ten grand a year because they gotta get
their principal back at some point bringing their total annual
repayment to twenty five thousand dollars so that after fifteen
years the loan companies can finally be paid off and
presumably loan the money to some other deserving student But
here's Job reality 10:14 history and english majors and we
know this here It's come up because way hire them
well Other than its mup there are almost no jobs
for history and english majors today other than driving uber
or being a barista may be bartending or you know
convincing hotties to pay your rent by quoting shakespeare about
that not a real job and no union and all
that is said you know until those jobs were taken
over by driverless cars and robots and artificially intelligent computers
pitching woo for the shakespeare quote thing and the relatively
few jobs that do exist don't exactly pay a ton
of money like think forty grand a year for starters
So on forty grand you'll pay say make grand in
taxes and other government fees That leaves you about thirty
two thousand dollars toe live on and to pay off
your loans but you're one you owe twenty five grand
on your loans Fifteen is interest which is not tax
deductible by the way and ten grand is in principle
Pay down So that leaves you seven thousand bucks toe
live on Was that what you spent on haircuts Clothing
in car insurance alone last year What about eating Is
that optional How about rent and like anything else Yeah
you can't afford it So hopefully your parents haven't rented
out your room yet So why is this thing called
a crisis Haven't you been listening Because loans of magnitude
Have continued to flow out of the various coffers that
loan money to students and the ability to repay those
loans is getting worse and worse and worse Well eventually
the system grinds to a halt with massive declines in
loans made and then what happens Riots What happens when
students air simply denied the ability to go to college
altogether What will they do Demand colleges drop tuition costs
with colleges care colleges are going bankrupt too by the
way and be nice if they could drop tuition costs
But other than the top forty or fifty colleges around
the country Well most schools of higher learning or just
barely scraping by many you're committed to very high fixed
recurring costs in the form of tenured professors they and
not fire expensive building and land maintenance and insurance for
you know creative student activity and so on someone and
so on It all adds up such that tuition needs
to remain high just to pay those bills and keep
going Could the government step in and just like big
mama pay all the bills Well your feelings about this
issue will vary with your political alignment but that still
doesn't solve the issue of rising costs which will keep
on getting higher and higher And no matter who's footing
the bill and why's it fair for the government to
take money from high earners and give itto low earners
for something like college that has unclear financial payback Is
that fair What's our solution but we don't have one
but it's not how shmoop rolls Our only advice is
think long and hard when picking a college major and
taking loans out for school That means keeping your hands
off ebay and amazon and keeping your nose in the
books and look really hard at majoring in engineering or
something Next time you meet a french literature major foreign 00:05:46.295 --> [endTime] coffee for you at starbucks
Up Next
What are Aging Receivables/an Allowance for Doubtful Accounts? The allowance for doubtful accounts subtracts those receivables that are not going t...
What are Collection Agencies? Collection agencies are debt collection companies that specialize in recovery of overdue or defaulted debt obligation...
What is the Fair Debt Collection Practices Act? The Fair Debt Collection Practices Act is the set of rules that debt collectors follow. These rules...
What is Days Sales Outstanding? Days sales outstanding is a figure that looks at how long it takes a company to get their money after they’ve mad...