In business, bad debt is the part of a loan or assortment of loans a lender considers to be uncollectable. When the goods are sold to a consumer on credit and if the amount becomes irrecoverable due to his insolvency or for some other cause, the total not recovered is called bad debts. For recording it, the bad debts account is debited because the unrealised amount is a loss to the business and the customer’s account is credited.
The term bad debt generally refer to accounts receivable (or trade accounts receivable) that will not be collected. However, bad debt can also refer to notes receivable that will not be collected.
Example: Jamuna who owed us Rs.10,000 is declared insolvent and 25 paise in a rupee is received from her on 15th July, 2003.