What is a Bad Debt?
-
What is a Bad Debt?
Goods and services are sold to customers on either a cash or credit basis. Sales on a cash basis means that the business receives payment immediately, and in return, the customer will receive the goods and services as soon as possible. On the other hand, the process is slightly different when the goods and services are sold on a credit basis. Like cash sales, the goods and services are provided to the customers now, but the difference is when the payment is made. The customer will agree not to pay straightaway but at a future date. Because the payment is delayed to a later date, it increases the risk of the business never actually receiving the full amount owed by the customer. Additionally, it will create a trade receivable in the financial statements, where a customer is in debt to the business. When a customer has difficulties paying back, normally, they will only be able to pay a proportion of the debt back to the business. However, in some cases, the customer may not pay back any of the amount owed. If the business decides that the customer is highly unlikely to pay, the debt will be identified as a bad debt or also known as an irrecoverable debt.
