What is Bad Debt?

Bad Debt is an accounts receivable that is no longer considered collectible and must be written off as an expense. This occurs when a customer is unable or unwilling to pay the amount they owe, for reasons such as bankruptcy or financial distress.

For Startups: For B2B startups with a small number of large clients, a single bad debt can have a significant impact on cash flow and profitability. It's essential to have a clear credit policy to assess the financial health of potential customers before offering them credit. Creating a "provision for doubtful debts" is also a prudent accounting practice to anticipate potential bad debts.

Example: A startup has a receivable of ₹5 Lakhs from a client who has gone out of business. After exhausting all collection efforts, the startup writes off the ₹5 Lakhs as a bad debt expense on its income statement.