Bad debt refers to an amount of money owed to a company that is unlikely to be collected. It is the result of a customer or client not paying a debt that they were obligated to pay. This can happen for a variety of reasons, including default, bankruptcy, or inability to pay.
It's also called uncollectible debt, defaulted debt, non-performing loan, unrecoverable debt, write-off debt, and loss.
In accounting terms, bad debt is recorded as an expense on the income statement and can have a significant impact on a company's financial performance. It is important for companies to monitor and estimate their bad debt exposure, as it can affect the overall health of their business and their ability to pay debts and invest in future growth.
To estimate bad debt, companies often use a number of methods, including analyzing past payment history, credit scores, and economic indicators. This information is used to determine the probability of default and to establish a provision for bad debt, which is an estimate of the amount of bad debt that is expected to occur.
There are several methods for accounting for bad debt, including the allowance method and the direct write-off method. The allowance method involves estimating bad debt and setting aside an allowance for doubtful accounts. The direct write-off method involves writing off the debt as soon as it becomes uncollectible.
In conclusion, bad debt is an important issue for companies to manage, as it can have a significant impact on their financial performance. Proper monitoring and estimation of bad debt is crucial in ensuring the overall health of the business.