What is the Difference Between Bad Debt and Doubtful Debt?

The difference between bad debt and doubtful debt lies in the certainty of the debt being uncollectible and their impact on a company's financial records. Here are the main differences between the two:

• Bad Debt: This refers to a specific account receivable that has been clearly identified as not being collectible. The company has exhausted all efforts to collect payment from a customer and concludes it will never receive the payment. Therefore, it writes off the debt as a loss in the income statement under "bad debt expense" and reduces the corresponding accounts receivable by the same amount.
• Doubtful Debt: A doubtful debt is an account receivable that might become a bad debt at some point in the future, but it hasn't yet been specifically identified as such. This term is used when a company believes a certain percentage of its receivables will not be collected, although it does not yet know which specific receivables will not be paid.

Companies typically set up a "provision for doubtful debts," which is an estimated amount set aside to cover potential losses from debts that will become uncollectible. This provision is considered a "contra asset" because it reduces the amount of an asset, in this case, the accounts receivable. In summary, the difference between bad debt and doubtful debt is essentially a matter of certainty: bad debts are certain to be uncollectible, while doubtful debts may become uncollectible in the future.

Comparative Table: Bad Debt vs Doubtful Debt

Here is a table summarizing the differences between bad debt and doubtful debt:

• Bad Debt: This refers to the receivable amount that has essentially been deemed uncollectible by the company. The company has exhausted all efforts to collect payment from a customer and concludes it will never be able to collect the debt. Therefore, it writes off the debt as a loss in the income statement under "bad debt expense".

• Doubtful Debt: This is a receivable that might become a bad debt at some point in the future, but hasn’t yet specifically been identified as such. It is an estimated amount set aside to cover potential losses from debts that will become uncollectible in the future.

In summary, the difference between bad debt and doubtful debt is essentially a matter of certainty: bad debts are certain to be uncollectible, while doubtful debts may become uncollectible in the future.