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The difference between bad debt and ‘doubtful’ debt

When a customer invoice remains unpaid, it’s easy to class it as a ‘bad debt’ immediately. There is, however, what is known as ‘doubtful debt’, which puts some transactions into a slightly different category.


The key difference is in the wording. Bad debts are those which cannot be collected by the business, and will usually have been clearly identified as such. Doubtful debts, in comparison, are unlikely to be collected. There is still the possibility of receiving payment for these outstanding balances, however small.


Avoid making assumptions about company debts

A debt is only bad if all efforts have been exhausted to seek payment and the balance still remains outstanding. This could come about through the customer declaring bankruptcy, a lack of information, or even if chasing the debt costs the company more than the amount outstanding.


Make allowances for debt in doubt

There are a number of reasons why a debt could be doubtful rather than simply bad. A delay at the supplier’s end of the chain or a customer dispute may delay the process.

It’s advisable to allocate a portion of available resources to bridging the gap between a doubtful debt and the company’s related financial obligations. This balance is entered as a credit and a debit, keeping the figure balanced and ensuring it remains separate from any actual bad debts entered into accounting books. It can then be revised on either payment of the invoice or a lapse into bad debt.


Don’t let doubtful debts go bad

A doubtful debt has the potential to become a bad debt in future if left unchecked. Writing off a debt represents a financial loss to the business, so any opportunity to chase up with the customer should be capitalised on.


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