Bad debts
In one sentenceAmounts owed by customers that the business is certain will not be collected, for example because the customer went bankrupt or disappeared, so they are written off the customers account.
Simply put
A debt becomes bad when there is no longer any hope of collecting it, not merely because it is late. Before that it is a doubtful debt for which an allowance is made.
If you have an allowance for doubtful debts, the bad debt is written off against it. If not, it is recorded directly as an expense in the period.
Worked example
A distribution business is owed 8,000 SAR by a grocery that closed down, and the business collected only 2,000 SAR from it.
Customer balance8,000 SAR
Collected2,000 SAR
Dr Allowance for doubtful debts, Cr Accounts receivable6,000
Bad debt written off: 8,000 − 2,0006,000 SAR
Don't confuse it with
Allowance for doubtful debtsThe allowance is an estimate of an expected loss that has not happened yet, while a bad debt is a loss that has actually happened.