Bad Debt

Bad debt is debt that is delinquent to the point it can't be recovered.

Say you owe your doctor money for copays, and you don't pay it. Eventually it goes to collections. The collection agency can then collect it, but the doctor's office no longer can, because it's passed on to the agency. The doctor's office would record that as bad debt...money the office is owed, but will not get back, at least not directly or in full. Generally it's included in the income statement.

There are two ways to calculate and record it. The first is the direct write off method, where the business writes off the amount owed as soon as it becomes uncollectible. The other is allowance method. This method records an estimated dollar amount that was lost in the period.