Uncollectible receivable amount that must be recognized as expense directly or absorbed through an existing allowance estimate.
Bad debt is a receivable amount the business no longer expects to collect. In practice, the term can refer to the loss itself, the expense recognized for expected uncollectible balances, or the specific customer account that is written off.
Bad debt affects reported profit, the quality of receivables, and the credibility of credit sales. If it is ignored, both assets and earnings can look stronger than they really are.
Many businesses estimate bad debt in advance through an allowance for doubtful accounts. That approach matches expected credit losses to the period in which the related sales were recorded.
When a particular invoice is confirmed as uncollectible, the account is usually written off against the allowance. Under a direct write-off approach, the expense is recognized only when the account fails, but that approach is usually less faithful for external reporting because it delays the loss.
At year-end, a company records an estimate for likely credit losses:
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | 3,200 | |
| Allowance for Doubtful Accounts | 3,200 |
Later, a specific 700 receivable is written off:
| Account | Debit | Credit |
|---|---|---|
| Allowance for Doubtful Accounts | 700 | |
| Accounts Receivable | 700 |
Bad debt is not the same as a doubtful account. A doubtful account may still be collected, while bad debt has moved into expected or confirmed non-collection. A later write-off also does not always create a new expense if the allowance was already recorded.