Bad Debt

  

Bad debt is debt that is delinquent to the point it can't be recovered.

Say you owe your doctor money for copays, and you don't pay it. Eventually it goes to collections. The collection agency can then collect it, but the doctor's office no longer can, because it's passed on to the agency. The doctor's office would record that as bad debt...money the office is owed, but will not get back, at least not directly or in full. Generally it's included in the income statement.

There are two ways to calculate and record it. The first is the direct write off method, where the business writes off the amount owed as soon as it becomes uncollectible. The other is allowance method. This method records an estimated dollar amount that was lost in the period.

Related or Semi-related Video

Finance: What are Aging Receivables/an A...70 Views

00:00

Finance a la shmoop what are aging receivables and an allowance for doubtful accounts

00:10

A lot of people don't realize this but that was the original title of Moby [Book title changes to Moby Dick]

00:13

Dick yeah all right My aching receivables that's your

00:18

balance sheet talking well wine is about the only thing that gets better with age [Wine poured into a glass]

00:22

and even it has its limits there yeah aliens go ahead and pour yourself a

00:26

glass all right when receivables a balance sheet item

00:30

that lives right here get old they - generally speaking get bad note how much

00:36

higher the probability of non collection called deadbeat-ism gets as the age of

00:42

the receivables increases well generally speaking bills that are gonna get paid

00:46

generally get paid fast or at least on time and those that don't have to be

00:52

tracked well best guesses matter in accounting so coming to an actual

00:56

predicted rational and reasonable number is a big deal and you can see that in [Man discussing receivables]

01:01

this case the spread between the legally owed money and the amount likely to be

01:07

collected is a pretty big spread well the decline hits the assets side of the

01:12

balance sheet in the form of accounts receivable here being lower and [Accounts receivable column highlighted]

01:16

eventually when a bad debt is finally recognized as a deadbeat bad debt never

01:22

to be collected and is dead dead dead well then it simply gets written off on

01:27

the income statement or well said another way it goes away as a sale that

01:31

never happened so that's aging receivables in a nutshell and yeah this [Aging receives inside a nut]

01:36

is the one time you don't need to respect the elderly [Man trips over elderly man and gives thumbs up]

Up Next

Finance: What are Collection Agencies?
12 Views

What are Collection Agencies? Collection agencies are debt collection companies that specialize in recovery of overdue or defaulted debt obligation...

Finance: What is the Fair Debt Collection Practices Act?
1 Views

What is the Fair Debt Collection Practices Act? The Fair Debt Collection Practices Act is the set of rules that debt collectors follow. These rules...

Finance: What is Days Sales Outstanding?
30 Views

What is Days Sales Outstanding? Days sales outstanding is a figure that looks at how long it takes a company to get their money after they’ve mad...

Finance: What is the Student Loan Crisis?
24 Views

What is the student loan crisis? The student loan crisis describes the situation that faces our country; namely the fact that there is over a trill...

Find other enlightening terms in Shmoop Finance Genius Bar(f)