Definition of Bad Debt and Doubtful Debt
In accounting, the terms bad debt and doubtful debt usually refer to the amounts owed by a company's customers who purchased goods or services but the amounts are likely to be uncollectible. The amount owed by customers are included in the balance of the current asset account Accounts Receivable. In other words, the terms bad debt and doubtful debt have the same meaning.
Example of Bad Debt and Doubtful Debt
Assume that $5,200 of a company's $200,000 of accounts receivable are estimated to be uncollectible. For accounting purposes, the company should establish a current asset account entitled Allowance for Doubtful Accounts or Allowance for Uncollectible Accounts.
If the customers' account are not yet written off, the Allowance account should report a credit balance of $5,200 so that the company's balance sheet will report the net realizable value of $194,800.
If the balance in the Allowance account was $0, the company will write an adjusting entry to:
- Debit the income statement account such as Bad Debts Expense, Doubtful Accounts Expense, Uncollectible Accounts Expense, etc. for $5,200
- Credit the balance sheet account Allowance for Doubtful Accounts for $5,200
To gain more insight on this topic go to AccountingCoach.com's explanation of Adjusting Entries, Part 1.
