Money owed to a business that is unlikely to be collected and is written off as an expense, reducing both accounts receivable and profit.
Bad debt occurs when customers fail to pay their invoices despite collection efforts. Under accounting standards, companies must estimate and provision for bad debts using either the direct write-off method (when specific debts become uncollectible) or the allowance method (estimating a percentage based on historical data). Under Indian tax law, bad debt can be claimed as a deduction if it was previously recognized as income.
A business has ₹50,00,000 in credit sales and writes off ₹1,50,000 as bad debt. Bad debt ratio = 3%. The industry average is 2%, suggesting the company needs stricter credit policies.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
When all reasonable collection efforts have failed — typically after 180–365 days past due, depending on company policy. Legal action may be taken before write-off for large amounts.
Yes. If a previously written-off debt is later recovered, it's recorded as 'Recovery of Bad Debt' — credited to income. The amount collected increases both cash and profit.
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