Bad Debt is an amount of money that a lender or business is unable to recover from a borrower or customer and is considered unlikely to be paid back.
Bad debt arises when a borrower fails to repay a loan or a customer does not pay dues despite repeated reminders and collection efforts. In banking and finance, bad debt usually refers to loans that turn into Non-Performing Assets (NPAs) because interest or principal payments are overdue for a long period.
In accounting, bad debt is treated as an expense and is written off in the books to reflect the true financial position of a business. This helps companies avoid overstating income or assets. Bad debts commonly occur due to customer insolvency, financial distress, poor credit assessment, or economic downturns.
Managing bad debt is important for banks and businesses as high bad debt levels can impact profitability, cash flow, and financial stability. Proper credit checks, timely follow-ups, and risk management help reduce bad debt losses.
"A company sells goods worth ₹50,000 on credit, but the customer later becomes bankrupt and cannot pay. The ₹50,000 amount is recorded as bad debt in the company’s accounts."