Bad Debt Reserve, Bad Debt Allowance and Doubtful Debt Defined
Bad Debt
Bad debt is a debt that a creditor is unable to collect, and has made many efforts to do so previously. Companies usually write off bad debt because it reduces the taxable income.
Doubtful Debt
Doubtful debts are debts that a company or business is unlikely to collect, where non payment often results from disputes over delivery, supply, condition of goods and financial stress. If this happens it is important that the debt is added to the doubtful debt reserve. This is done in order to avoid over stating the business assets. When there is no longer any doubt that the debt cannot be collected it becomes Bad Debt
