Bad Debt

Bad debt arises when a debtor is unable to meet the obligation of repayment, and the creditor deems the debt uncollectible. In accounting, bad debts are recognized as an expense, as the receivable income is no longer expected to be realized, affecting the company's net income and asset valuation. Recognizing bad debts is essential for providing a realistic assessment of a company's financial position. Companies may use various methods to estimate the amount of bad debt to account for in their financial statements.