Bad Debt
Bad debt is money you are owed but have decided you will realistically never collect. The client may have vanished or gone under. Writing it off only clears it from your books.
What it means
Most unpaid invoices are not bad debt. Most late payers do pay in the end, if you send reminders at the right pace. Bad debt is the smaller set that is truly gone. The client's business closed, or they stopped answering. Or the amount is so small that chasing it would cost more than it would recover. Small claims court and collections agencies both charge.
Writing it off is an accounting decision. It means you stop counting that invoice as money you will collect. Your accounts receivable then show the real position, with no balance that will never arrive. Ask an accountant how a write-off affects your own tax.
A client owes you $340 for a job finished eight months ago. They have gone quiet and their number is disconnected. A collections agency's fee is not worth $340. You write it off as bad debt. It stops showing as money you are owed, though it never arrived.
Leaving an uncollectable invoice in accounts receivable for years because you hate to write it off. It makes you think you are still owed more than you are.
General information, not legal or tax advice. Rates and rules vary by place; check yours. See our terms for the full version of this note.
See also
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