Bad Debt
A bad debt is a customer receivable, or part of one, that a business concludes it will not collect.
A late invoice is not automatically a bad debt. Collection may still be likely after a reminder, payment plan or dispute is resolved. A debt becomes bad when the available evidence supports the conclusion that recovery is no longer reasonably expected.
Bad debt affects accounts receivable, profit and sometimes tax or GST reporting. The exact accounting treatment depends on the reporting framework and whether the business has already recognised an allowance for expected credit losses.
Where Bad Debt Appears
You may see bad debt in:
- an ageing analysis showing old unpaid invoices
- customer collection notes and correspondence
- an expected-credit-loss or doubtful-debt allowance
- a bad-debt expense account
- journal entries removing an uncollectible receivable
- tax workpapers and year-end accounting reviews
Bad debts are easier to identify when invoices, reminders, disputes and attempted collections are documented in a clear audit trail.
Bad Debt, Late Payment And Credit Note
| Term | What It Means | Typical Next Step |
|---|---|---|
| Late Payment | The invoice is overdue but may still be collected | Follow up, resolve disputes or agree a payment plan |
| Expected Credit Loss | An estimate of receivables the business may not collect | Recognise or update an allowance under the applicable framework |
| Bad-Debt Write-Off | A specific receivable is judged uncollectible | Remove it using the correct expense or allowance entry |
| Credit Note | The original customer charge is reduced or corrected | Adjust the sale for the genuine correction, return or allowance |
A credit note and a bad-debt write-off are not interchangeable. A credit note changes the amount validly charged to the customer. A bad-debt write-off concerns a valid amount that became uncollectible.
How Bad Debt Is Recorded
Under AASB 9 and IFRS 9, some businesses recognise expected credit losses before individual invoices are finally written off. The current AASB 9 guidance includes a simplified lifetime expected-credit-loss approach for qualifying trade receivables.
When a specific receivable is written off, the entry generally reduces accounts receivable. The other side may use an existing loss allowance or recognise bad-debt expense, depending on what has already been recorded and the accounting framework.
There is no universal rule that an invoice becomes bad after a fixed number of days. Age is evidence, but customer circumstances, disputes, insolvency, security and collection history also matter.
Simple Example
A business issued a valid $1,000 invoice and recorded the sale under accrual accounting. After documented collection attempts and evidence that the customer cannot pay, the business concludes that nothing will be recovered.
If no allowance was previously recognised, a simplified write-off may debit bad-debt expense for $1,000 and credit accounts receivable for $1,000. If an allowance already covers the loss, the write-off normally uses that allowance instead. An accountant should confirm the correct entry for the business’s reporting framework.
Accounting And Tax Are Separate
Writing off a receivable in the accounts does not automatically create a tax deduction. In Australia, section 25-35 of the Income Tax Assessment Act 1997 sets conditions that generally include writing the debt off as bad in the income year and having previously included it in assessable income, unless the debt arose in an eligible money-lending business.
That distinction is important for cash-basis businesses, which may not have recognised the unpaid sale as income. GST or VAT adjustments and later recoveries also vary by jurisdiction. Keep the evidence and obtain tax advice where the treatment is material or uncertain.
Why Bad Debt Matters
Uncollectible invoices overstate assets and can make profit and cash forecasts look stronger than they are. Monitoring days sales outstanding and receivable ageing helps a business follow up earlier and estimate credit losses more realistically.
Bad debt also exposes weaknesses in customer approval, payment terms, invoicing, dispute handling and collection processes.
How Gimbla Can Help
Gimbla keeps customer invoices, payment status and reminder activity connected to accounts receivable. That record helps a business distinguish an invoice that is merely late from one requiring an impairment or write-off entry.
Use the accounting treatment recommended by your accountant or bookkeeper, preserve the original invoice trail and reconcile any later recovery to the correct account.
Related Terms
- Accounts Receivable
- Ageing Analysis
- Days Sales Outstanding
- Credit Note
- Expense
- Accrual Basis Accounting
Helpful Gimbla Guides
In Short
A bad debt is a receivable the business does not reasonably expect to collect. It should be distinguished from a late payment, an estimated credit loss and a credit note, with accounting and tax treatment checked separately.