What Is a Bad Debt?
Definition, journal entries, and the allowance for doubtful debts.
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| Recorded as | Expense (bad debts expense) |
|---|---|
| Related to | Accounts receivable |
| Topic | Financial accounting · Receivables |
Bad debt in plain English
When you sell on credit, you risk that some customers will never pay. Once it is clear that a particular debt cannot be collected, it is removed from receivables and charged as an expense.
Worked example
A customer owes 1,500 and has gone bankrupt. The business writes the debt off.
| Account | Debit | Credit |
|---|---|---|
| Bad debts expense | 1,500 | |
| Accounts receivable | 1,500 |
Allowance method: instead of waiting, a business can estimate bad debts in advance. If it expects 2% of 50,000 of receivables to go bad, it debits Bad debts expense 1,000 and credits Allowance for doubtful debts 1,000. The allowance is deducted from receivables on the balance sheet.
- Recording the loss as a reduction of sales instead of an expense.
- Waiting to write off until cash is clearly lost, which can overstate profit in earlier periods.
Frequently asked questions
What is the difference between bad debts and doubtful debts?
A bad debt is one that is known to be uncollectable. A doubtful debt is one that may not be collected, so an allowance is set aside for it.
What if a written-off debt is later paid?
Reverse the write-off (debit Accounts receivable, credit Bad debts recovered), then record the cash receipt as normal.
Is bad debt an expense?
Yes. It reduces profit in the period it is recognised.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.