bad debt

Accounts receivable that is unlikely to be paid and is treated as loss. A firm may use one of the two methods in writing off such losses against its sales revenue: (1) by deducting the uncollectible amounts from revenue in the accounting period they are deemed uncollectible (see direct write off method), or (2) by deducting an estimated amount from revenue in each accounting period and adjusting any excess or shortfall in the following accounting period (see allowance method). The ratio of bad debt losses and the open account (credit) sales is an indicator of the quality of a firm's collectibles, and the efficiency of its credit monitoring efforts. Also called uncollectible account.