Bad Debt vs Doubtful Debt
Bad debts and doubtful debts are terms used to refer to money that has been owed to a business, by its customers, who have obtained the goods and services prior to paying a price. The amount owed is expected to be paid within a given period, and depending on the time taken to repay the debts and the probability of repayment, these amounts need to be recorded in the accounting books and doubtful debts or bad debts. The following article explains these two forms of debt, showing the distinction between the two clearly.
What is a Bad Debt?
A bad debt is referred to as an amount that most certainly will not be received by the business. These amounts are accounts receivable that have been recorded in the books for a long period of time, (a long period, past the repayment period stated, when providing credit to the customer), and no efforts have been made by the debtor to make repayments. Once a bad debt is identified, it will be removed from the accounts receivable account with a credit entry and will be debited to the bad debts expense account.
What is a Doubtful Debt?
A doubtful debt, as its name suggests, is an accounts receivable that the business is not sure whether it will receive. Since accounting concepts state that any provisions need to be made against unsure receipts, an account called ‘provision for doubtful debts’ will be maintained alongside to recover the debt, if it becomes a bad debt. The accounting entry will require a debit to be made in the provision for loss account and a credit entry to be made in the provision for doubtful debts account. Once this entry is completed the provision will be recorded in the balance sheet by deducting that amount from the debtors. Depending on the probability of bad debts, the provision for doubtful debt account maybe increased or decreased.
Bad Debt vs Doubtful Debt
The similarities between the provision for doubtful debts and bad debts accounts are that they are in line with the accounting principles of showing the true and correct view of the business in its accounting books. A bad debt account will show exactly how much of the accounts receivable will not be received, and a provision for doubtful debts account will show the amount of receivables that may or may not be received. The accounting entries for the two types of accounts are quite different from each other, even though, there is a high possibility that a doubtful debt will become a bad debt in the future. Through maintaining a provision for doubtful debts account, the business is able to leave aside a specific amount, so that the losses to the business can be recovered. Maintaining bad debts and doubtful debts accounts are also important for credit control.
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What is the difference between Bad Debts and Doubtful Debts? • Bad debts and doubtful debts are terms used to refer to money that has been owed to a business, by its customers who have obtained the goods and services prior to paying a price. • A bad debt is referred to as an amount that most certainly will not be received by the business. Once a bad debt is identified, it will be removed from the accounts receivable account with a credit entry and will be debited to the bad debts expense account. • A doubtful debt, as its name suggests, is an accounts receivable that the business is not sure whether it will receive. The accounting entry will require a debit to be made in the provision for loss account and a credit entry to be made in the provision for doubtful debts account. • The similarities between the provision for doubtful debts and bad debts accounts are that they are in line with the accounting principles of showing the true and correct view of the business, in its accounting books. • Maintaining bad debts and doubtful debts accounts are also important for credit control.
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