Bad Debt
In 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.
A debt that
is not
collectible
and
therefore
worthless to
the
creditor.
This occurs
after all
attempts are
made to
collect on
the debt.
Bad debt is
usually a
product of
the debtor
going into
bankruptcy
or where the
additional
cost of
pursuing the
debt is more
than the
amount the
creditor
could
collect.
This debt,
once
considered
to be bad,
will be
written off
by the
company as
an expense.
Most
companies
make sales
on credit as
it generally
allows them
to increase
their sales,
even though
some sales
are to
customers
with less
than
desirable
credit.
Companies
that do make
credit sales
will
estimate the
amount of
sales they
expect to
lose to bad
debt, which
is found in
the
allowance
for doubtful
accounts. A
debtor with
a history of
bad debts
will see
their credit
rating
decline,
which makes
it difficult
for the
debtor to
access any
additional
form of
credit.
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