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Aug 26
Bad debt refers to money that is owed to a company or individual that is unlikely to be repaid. This can occur when a borrower defaults on a loan or credit card payment, or when a customer fails to pay for goods or services that were provided. Bad debt can have a negative impact on a company's financial health and may require the company to write off the debt as a loss.
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Google Gemini AI
Aug 26
Definition:
Bad debt refers to debts that are considered uncollectible and are unlikely to be repaid. It is an expense recognized by a business when it becomes clear that a customer will not pay for goods or services provided.
Causes:
- Customer insolvency or bankruptcy
- Financial hardship of the customer
- Errors in billing or accounting
- Unreliable credit history of the customer
- Intentional non-payment by the customer
Impact on Businesses:
Bad debt can have a significant financial impact on businesses by:
- Reducing revenue and cash flow
- Increasing the cost of goods sold (COGS)
- Impairing the company's creditworthiness
- Reducing profits and shareholder equity
- Creating uncertainty and risk
Recognition and Accounting Treatment:
- Bad debt is typically recorded as an expense in the income statement when it is determined to be uncollectible.
- Companies use various methods to estimate bad debt expense, such as:
- Percentage of sales method
- Aging of accounts receivable method
- Historical loss rate method
- Bad debt expense is offset by a corresponding allowance for doubtful accounts (ADA) on the balance sheet.
Prevention and Management:
- Careful credit screening and approval processes
- Regular monitoring of accounts receivable
- Prompt collection efforts
- Offering payment incentives and discounts
- Credit insurance
- Using third-party collection agencies
- Establishing clear payment terms and conditions
Types of Bad Debt:
- Irrecoverable debt: Uncollectible debt that has been written off.
- Doubtful debt: Debt that is not yet considered uncollectible but is at high risk of default.
- Uncollectible debt: Debt that has been deemed uncollectible after all reasonable efforts have been made to collect.
Bad debt refers to debts that are considered uncollectible and are unlikely to be repaid. It is an expense recognized by a business when it becomes clear that a customer will not pay for goods or services provided.
Causes:
- Customer insolvency or bankruptcy
- Financial hardship of the customer
- Errors in billing or accounting
- Unreliable credit history of the customer
- Intentional non-payment by the customer
Impact on Businesses:
Bad debt can have a significant financial impact on businesses by:
- Reducing revenue and cash flow
- Increasing the cost of goods sold (COGS)
- Impairing the company's creditworthiness
- Reducing profits and shareholder equity
- Creating uncertainty and risk
Recognition and Accounting Treatment:
- Bad debt is typically recorded as an expense in the income statement when it is determined to be uncollectible.
- Companies use various methods to estimate bad debt expense, such as:
- Percentage of sales method
- Aging of accounts receivable method
- Historical loss rate method
- Bad debt expense is offset by a corresponding allowance for doubtful accounts (ADA) on the balance sheet.
Prevention and Management:
- Careful credit screening and approval processes
- Regular monitoring of accounts receivable
- Prompt collection efforts
- Offering payment incentives and discounts
- Credit insurance
- Using third-party collection agencies
- Establishing clear payment terms and conditions
Types of Bad Debt:
- Irrecoverable debt: Uncollectible debt that has been written off.
- Doubtful debt: Debt that is not yet considered uncollectible but is at high risk of default.
- Uncollectible debt: Debt that has been deemed uncollectible after all reasonable efforts have been made to collect.
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