Definition of bad debt
bad debt (plural bad debts)
- (business, accounting) A debt which cannot be recovered from the debtor, either because the debtor doesn't have the money to pay or because the debtor cannot be found and/or forced to pay.
Allowance for Bad Debts are amounts expected to be uncollected. For example, if gross receivables are $100,000 and the amount that is expected to remain uncollected is $5,000, the net current asset section of the balance sheet will be:
Accounts receivable $100,000
Less: Allowance for bad debts $5,000
Net Receivables $95,000
In financial accounting and finance, bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans. Bad debt in accounting is considered an expense.
There are two methods to account for bad debt:
- Direct write off method (Non-GAAP) - a receivable which is not considered collectible is charged directly to the income statement.
- Allowance method (GAAP) - an estimate is made at the end of each fiscal year of the amount of bad debt. This is then accumulated in a provision which is then used to reduce specific receivable accounts as and when necessary.
- Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.