A bad debt occurs when a company’s customers are unable to pay all or part of the amount owed, often due to factors such as bankruptcy. In accounting terms, a bad debt indicates that an invoice has not been paid, resulting in a potential loss for the business.
Defining bad debt
Bad debt is essentially any amount of money that a creditor must write off when a borrower defaults on loans.
This situation arises when the debtor, whether an individual or a business entity, displays no promise of repaying the borrowed amount, either partially or in full. When such debts become uncollectible, they are recorded as charge-offs.
When should invoices be written of as bad debt?
When to write off an invoice is important. In this way, you are managing a good financial status for your business. An invoice may be considered for write-off as a bad debt if all reasonable attempts to collect payment have failed. This includes reminders and possibly negotiations over an extended period. It is often around 90 to 120 days past the due date.