What is a Bad Debt?

Marketing Business Network

26 Mar 202202:07

Summary

TLDRThis video explains the concept of bad debt, which refers to money borrowed that a borrower cannot or will not repay. It also discusses related terms such as bad loans and delinquent loans. Bad debt often results when a borrower goes bankrupt, and the cost of recovering the debt exceeds the amount owed. A bad debt is written off as an expense by the lender, whereas a doubtful debt is a situation where the lender is unsure but still hopes to recover the money. The video provides clarity on how businesses should handle these types of debts.

Takeaways

💰 Bad debt is money that a borrower cannot or will not repay, which can also be called a bad loan or delinquent loan.
📉 The exact definition of bad debt varies by country and company, but it generally refers to loans that become problematic after being overdue for over 90 days.
🏦 In personal finance, a bad debt is often associated with high-interest loans taken to purchase goods or services.
🔴 A loan is considered a bad debt when the lender concludes that it will never be repaid, leading to a write-off in the profit and loss statement.
⚠️ Businesses should prepare for potential bad debts by making provisions as soon as they anticipate delinquent loans.
💸 Bad debts are often a result of the borrower going bankrupt or when the cost of recovering the money exceeds the amount owed.
📚 When the cost of collecting the debt is greater than the owed amount, it is more economical for the lender to write it off as a bad debt.
❗️ A bad debt must be removed from accounts receivable in accounting to accurately reflect the business's financial status.
🔄 A doubtful debt is a stage before bad debt, where the lender is uncertain if the debt will be repaid, so collection efforts continue.
💼 The main difference between bad debt and doubtful debt is the certainty of repayment—bad debt is a confirmed loss, while doubtful debt is still pursued with uncertainty.

Q & A

What is a bad debt?
-A bad debt is money that someone borrowed but cannot or will not repay. It may also be referred to as a bad loan or delinquent loan.
Can the definition of bad debt vary?
-Yes, the definition of bad debt may vary slightly from country to country and company to company.
What is an example of bad debt in personal finance?
-In personal finance, a bad debt is often a high-interest debt taken on by consumers when purchasing something from a store.
When does a loan become a problem loan?
-A loan becomes a problem loan when it is more than 90 days in arrears.
What happens when a lender concludes that a loan will never be repaid?
-When a lender concludes that a loan will never be repaid, it becomes a bad debt.
What should accountants do with bad debts?
-Accountants should write off the full amount of a bad debt in the profit and loss account.
What is recommended when a business sees a delinquent loan coming?
-The business should make provisions for delinquent loans as soon as it anticipates one.
What often causes bad debts?
-Bad debts are often the result of the borrower going into bankruptcy.
Why might a lender classify a loan as a bad debt?
-A lender might classify a loan as a bad debt if the cost of recovering the money is greater than the amount owed.
What is the difference between a bad debt and a doubtful debt?
-A bad debt is money the lender will never collect, resulting in a loss. A doubtful debt is one step before it becomes a bad debt, where the lender is unsure whether the debtor will pay.