An amount owed by a customer that is unlikely to be paid, resulting in a loss for the seller.
Bad debt refers to an amount owed by a customer that is unlikely to be paid, resulting in a loss for the seller. When a customer fails to make payment on an account receivable, the seller may classify the outstanding balance as bad debt, reflecting the fact that it is unlikely to be collected.
Bad debt can result from a variety of factors, such as customer bankruptcy, financial hardship, or disputes over the quality or delivery of goods or services. When a seller determines that an account is uncollectible, they may write off the outstanding balance as a bad debt expense, reducing the amount of accounts receivable and reflecting the loss on the company's financial statements.
In managing accounts receivable, preventing bad debt is a critical consideration. This may involve establishing clear credit policies and guidelines for extending credit, monitoring customer payment activity, and taking appropriate action to follow up on outstanding debts. When bad debt does occur, it is important to write it off in a timely and accurate manner, and to take steps to avoid similar losses in the future.
Overall, bad debt is an unfortunate but inevitable aspect of accounts receivable management. By understanding the causes of bad debt and taking appropriate steps to prevent and manage it, companies can minimize their losses, improve cash flow, and maintain positive relationships with their customers.