UK Accounting Glossary
It is known that a credit customer (debtor) is unable to pay the amount due.
Bad debt is a loss that a company incurs when credit that has been extended to customers becomes worthless, either because the debtor is bankrupt, has financial problems or because it can’t be collected.
Bad debt is the portion of a company’s receivables that are uncollectible. Companies account for bad debt either by the direct method or the allowance method. Under the direct method, the company reduces accounts receivable when a specific invoice is deemed uncollectible. While this method may seem logical, it is only allowed when total bad debt is small and immaterial. Under the allowance method, the company estimates the portion of accounts receivable that will be uncollectible and periodically records charges for bad debt expense. The allowance method is preferred because (a) it recognizes that bad debt is a normal, continually recurring cost of doing business, and (b) under the matching principle, the cost of bad debt more closely corresponds to reported revenue in the accounting period. A significant rise in the bad debt to accounts receivable and bad debt to sales ratios indicate greater risk and a deterioration in the quality of the company’s revenues. On the other hand, no or minuscule bad debt may indicate that the firm is too conservative in extending credit.
Bad debt has significantly and negatively impacted the bank’s profits this year.
The Auditors concluded that the volume of bad debt was wholly unacceptable and could be financially disastrous.
There is good debt and then there is bad debt.
The agency is excellent at recovering bad debt.
The company has had to allow for a £3 million provision for bad debt.
If they had acted more cautiously in the first instance; the banks would have had less bad debt to declare.
It only has a few subsidiaries to shunt bad debt into.
Profits in 1994 were bolstered by a significant fall in bad debt provisions to £372 million.
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This glossary post was last updated: 23rd December 2018.