Legal Dictionary

bad debt

Definition of bad debt


bad debt (plural bad debts)

  1. (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.

Further reading

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:

<table bgcolor="#CCCCCC"> <tr><td> Accounts receivable $100,000

Less: Allowance for bad debts $5,000

Net Receivables $95,000 </td></tr> </table>

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:

  1. Direct write off method (Non-GAAP) - a receivable which is not considered collectible is charged directly to the income statement.
  2. 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.


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