Bad debt is a receivable or credit exposure that is no longer expected to be collected and is usually written off or charged against an allowance.
Bad debt is an amount owed to a lender or seller that is no longer expected to be collected.
This page now also replaces the longer bad-debt guide, including write-off logic and estimation methods such as percentage-of-sales and aging of receivables.
In practical terms, it is the point at which a receivable stops being merely doubtful and becomes effectively unrecoverable. Once that happens, the business usually recognizes a loss through a Write Off, a Charge-Off, or use of an existing allowance balance.
Doubtful Debt is still uncertain. Payment may arrive, but collection risk is elevated.
Bad debt is the stronger conclusion: the amount is now treated as uncollectible or effectively unrecoverable.
Bad debt matters because it affects:
net receivables on the balance sheet
current-period expense and profit
collection strategy
tax treatment in some jurisdictions
credit policy and underwriting discipline
If a firm ignores bad debt, receivables can be materially overstated.
Under the Allowance Method, the business estimates expected non-collection in advance and records losses through Allowance for Doubtful Accounts.
Under the Direct Write-Off Method, the loss is recorded only when a specific account is judged uncollectible.
Bad debt often arises from:
customer insolvency
bankruptcy or liquidation
chronic delinquency
collection exhaustion
disputed or invalid invoices that will not be recovered
Doubtful Debt
Allowance Method
Allowance for Doubtful Accounts
Bad Debt Expense