Knowing the difference between bad debt and doubtful debt can help to prevent financial loss to your business.
Today’s uncertain economic climate is having a negative effect on UK business payment practices, with a recent study finding that 35% of invoices remain overdue on their due date.
Late or non-payment of an invoice is an unpleasant problem that all businesses are likely to face at some point.
If you’re struggling to collect a debt, it’s important not to write it off as a bad debt too early. Here’s a quick guide to recognising the differences between bad and doubtful debts.
Bad Debt
Bad debts, sometimes referred to as irrecoverable debts, are debts that a business is definitely unable to collect. In accounting terms, these debts are written off as expenses.
A debt doesn’t become a bad debt until a company has exhausted every possible effort to seek payment.
Examples of situations where a debt may be deemed as bad include:
- Customer declares bankruptcy.
- Chasing the debt costs more than the debt itself is worth.
Doubtful debt
Debts should only be written off as being bad if there is certainty that it will be impossible to ever collect them. If there is still a chance that a debt may be collected in the future it should be recorded as a doubtful debt. In accounting terms, doubtful debts are recorded as both a credit and a debit so that they can be revised in the future.
Examples of situations where a debt may be deemed as doubtful include:
- A supplier is causing a delay.
- There is a customer dispute.
- Customer is experiencing financial difficulties.
Here at Churchill Recovery Solutions, we provide a variety of effective, affordable and ethical debt collection services to help businesses to recover the money that they are owed.
Before writing off a debt, speak to our team of experts for help and advice by giving us a call on 0333 320 0748.