Bad Debt

What is Bad Debt?

Bad debt refers to an amount owed to a business that is unlikely to be collected. It usually arises when a customer who purchased goods or services on credit becomes unable or unwilling to pay their outstanding balance.

Why It Matters

• It represents a direct loss of revenue and must be recognized as an expense on the income statement.

• Companies use an allowance for doubtful accounts to estimate and prepare for these potential losses.

• High levels of bad debt can indicate poor credit policies or a weakening customer base.