Increased bad debt is a sign of the times, although it may exist even when business is thriving. If your business handles accounts receivable (A/R), you have probably already encountered customers who don’t pay, go out of business, or dispute the money owed to you. In some cases, bad debt write-off can be as high as 4-5%, but as a norm, bad debt should constitute less than 3% of your A/R.

If you want to record the A/R on your balance sheet older than 90 days, you should set up a contra account for bad debt. In effect, this is “allowance for bad debt,” enabling you to put the account directly underneath the A/R on the balance sheet. Constituting best business practices, allowance for bad debt takes away a certain amount that you doubt will be collected.

When this item appears on your balance sheet, it shows to those who read it that you understand that not all A/R is collectible and that you are monitoring your account collections regularly. It is advisable to keep a running record of what may turn out to be bad debts so that you have a clear view of the situation at any given time.