Definicja
A bad debt is accounts receivable that has been determined uncollectible. It's the flipside of extending credit to customers: some fraction will never pay, whether due to insolvency, disputes that drag on, or outright bad faith.
Two accounting treatments: 1. Direct write-off method — recognise the loss at the moment the debt is judged uncollectible. Required in some tax regimes for the deduction to apply. 2. Allowance method (GAAP / IFRS preferred) — estimate bad debts in advance based on historical loss rates, create a contra-asset "allowance for doubtful accounts," and adjust periodically. Specific debts are written off against the allowance as they fail.
Signals that a debt is turning bad: customer ignores dunning letters, goes into administration or insolvency, disputes without engaging, or a factoring provider declines coverage. At 90+ days overdue without response, most businesses treat a debt as doubtful; at 120-180 days, they typically write it off.
Tax treatment varies: in most countries, bad debts are tax-deductible only if the business has taken reasonable collection steps and documented the loss. VAT previously charged on a written-off invoice can often be recovered by issuing a credit note — check local rules.
Best defence: credit checks on new clients, clear terms, deposits for large or first orders, invoice promptly, and automate dunning.