In accounting and finance, bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans. Bad debt in accounting is considered an expense.

US Accounting Practice

Because of the matching principle of accounting, revenues and expenses should be recorded in period which they are incurred. When a sale is made on account, revenue is recorded along with account receivable. Because there is an inherent risk that clients might default on payment, accounts receivable have to be recorded at net realizable value. The portion of the account receivable that is estimated to be uncollectible is set aside in a contra-asset account called Allowance for Doubtful Accounts. At the end of each accounting cycle, adjusting entries are made to charge as expense the uncollectible receivable. The actual amount of uncollectible receivable is written off as an expense from Allowance for Doubtful Accounts to the account called Bad Debt Expense.