Not every receivable becomes cash. When collection attempts are exhausted — the customer has vanished, gone insolvent, or the amount no longer justifies the chase — the amount is reclassified from accounts receivable to bad debt: an expense that recognises the loss.
The mechanics are a write-off: the receivable leaves the books, profit takes the hit, and the sale that once looked like income finishes its life as a cost. Tax deductibility of the loss depends on your country and accounting method.
Why It Matters
Bad debt is the end-state the whole collections process exists to prevent — and pretending a dead invoice is still an asset only delays the truth while inflating your receivables. A small, honestly-recognised bad-debt rate is normal for any business extending credit; a growing one is a message about your terms, your clients, or your chasing.
Example
A contractor is owed $1,800 by a client whose company dissolved. After a final demand letter and a check on the liquidation, the invoice is written off: bad debt expense $1,800, accounts receivable −$1,800. The books now tell the truth.
Frequently Asked Questions
When should an unpaid invoice become bad debt?
When you have genuinely concluded it will not be paid — typically after sustained collection attempts fail, commonly somewhere past 90–180 days overdue, or immediately on events like customer insolvency. It is a judgment call your accountant can help calibrate.