Definition of Bad Debt

What does the term "bad debt" mean? What is meant by the term "bad debt"?

A "bad debt" occurs when it is determined that an accounts receivable amount is uncollectable.

When companies sell goods or services, they will often extend short-term credit to their customer. For instance, the customer will receive the service and will then be invoiced, with an agreement in place that the customer will pay within a certain period of time (usually 30 days).

An "accounts receivable" is when a customer owes an amount of money for a service or good that they have already received. The company expects to receive the money for this good or service.

A "bad debt" occurs when an accounts receivable amount is determined to be uncollectable. For instance, let's say that a customer is billed $1,000 for a plumbing job. The customer then goes bankrupt and is unable to pay this amount. The plumbing company would then write this amount off as a "bad debt". A "bad debt" is treated as an expense for the company.

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