Definition of Bad Debts
The term bad debts usually refers to accounts receivable (or trade accounts receivable) that will not be collected. (Bad debts is also used for notes receivable that will not be collected.)
The bad debts associated with accounts receivable is reported on the income statement as Bad Debts Expense or Uncollectible Accounts Expense.
Examples of Recording Bad Debts
There are two methods for recording the bad debts associated with accounts receivable:
- Direct write-off method, which removes the uncollectible amount directly from Accounts Receivable and records the amount as Bad Debts Expense
- Allowance method, which estimates the likely amount that will not be collected, and immediately credits Allowance for Doubtful Accounts and debits Bad Debts Expense.