bad debt n : a debt that is unlikely to be repaid

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A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed. This usually occurs when the debtor has declared bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself.

The debt is immediately written off by crediting the debtor's account and therefore eliminating any balance remaining in that account. A bad debt represents money lost by a business which is why it is regarded as an expense.

Doubtful debts are those debts which a business or individual is unlikely to be able to collect. The reasons for potential non payment can include disputes over supply, delivery, and conditions of goods, the appearance of financial stress within customers operation. When such a dispute occurs it is prudent s add this debt or portion thereof to the doubtful debt reserve. This is done to avoid over-stating the assets of the business as trade debtors is reported net of Doubtful debt. When there is no longer any doubt that a debt in uncollectable the debt becomes bad. An example of a debt becoming uncollectable would be:- once final payments have been made from the liquidation of a customer's limited liability company, no further action can be taken.