Bad Debt
Bad debt is money owed that is unlikely ever to be collected.
Bad debt is an invoice (or loan) the business does not expect to recover — because the customer cannot or will not pay. Companies estimate bad debt with an allowance based on history and aging, then write off specific invoices when they are confirmed uncollectible. Keeping bad debt low starts with credit checks and clear payment terms.
Example
Two invoices totalling $5,000 from a dissolved client were classified as bad debt.
Related terms
Frequently asked questions
What is the allowance for doubtful accounts?
It is an estimate of receivables that will not be collected, recorded as a contra-asset against accounts receivable. It lets financial statements reflect a realistic collectible amount before specific invoices are written off.
How can I prevent bad debt?
Check new customers' credit, set appropriate payment terms and credit limits, invoice promptly, follow up early on overdue accounts, and require deposits or prepayment from risky customers.
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