Bad debt

Debts owed to a company which are highly unlikely to be repaid and is therefore treated as a loss. These usually stem from a debtor going bankrupt or when the cost of collecting the debt would be more than the debt itself. Bad debts appear as an expense on the company’s balance sheet. Most companies have a bad debt allowance as it is unlikely all their debtors will repay what they owe but any unexpected bad debts can have a significant impact on their cash flow.

This definition is for general information purposes only