What are Bad Debts?

Bad debts (Definition)

Bad debt can be recorded in accounting as any outstanding debt that a business believes will be uncollectible in the future. Bad debt occurs when a company extends too much credit to a customer and the customer is unable to pay it back, resulting in the payment being delayed, reduced, or not received at all. Or it could be that the customer has secured a credit deal by deception or fraud. When customers are offered credit, the danger of bad debt always exists, so every business that lends credit to consumers needs to plan for the potential that the payment may not be received on the agreed-upon terms. On a balance sheet, only the amount that is expected to be collected is included in the total accounts receivable – this can be adjusted at a later date if necessary, and any payments received later for bad debts can be recorded as bad debt recovery payments.