Bad debt expenses are debts that are uncollectible. This typically occurs if your business delivers products or services to customers before receiving payment, and you later find out that these customers cannot pay for the goods or services delivered due to financial problems.
Don’t automatically write off these uncollectible debts as bad debt expenses. In the event of a bankruptcy, you have the right to collect the money owed after the court liquidates the assets of the bankrupted customer. However, if there is no chance that your business can get its money back, write off these uncollectible debts as expenses. A high bad debt expense indicates that your business may have an inefficient credit and collection process.