What is bad debt in accounts receivable?

Bad debt is the label accounting applies to receivables that a business has concluded will probably never be paid. In practical terms, it is the portion of invoices that get written off and absorbed as a cost of doing business. Most companies carry some bad debt expense every year, and the size of the number is one indicator of how healthy the underlying AR process is.

Two things drive bad debt: credit decisions at the front of the sales cycle, and follow-up discipline after the sale. A business that extends credit broadly without checks is going to have more bad debt than one that vets customers carefully. A business that follows up on overdue invoices within the first few weeks is going to have less bad debt than one that lets balances age past 90 days before anyone notices.

Because bad debt is counted as an expense when it is recognized, many businesses only feel the full impact at year-end, when the accountant rolls everything up. By that point, the balances are usually too old to meaningfully recover. Weekly visibility into the aging report is what prevents today's overdue invoice from becoming next year's bad debt entry.