Definition
Bad debt is an invoice amount that a business concludes it will not be able to collect, usually because the client has gone out of business, disappeared, or refuses to pay and legal action is not worthwhile. The amount is written off as an expense and removed from accounts receivable.
Also called: Uncollectible receivable, Doubtful debt
Bad debt in practice
Before writing off, document your collection attempts. In many jurisdictions a written-off bad debt is tax deductible, and VAT or GST charged on it may be reclaimable after a waiting period.
Frequently Asked Questions
When should I write off an invoice as bad debt?
When collection is clearly unlikely, typically after 90 to 180 days of documented reminders and at least one formal demand, or when the client is insolvent.