What does 'doubtful debt' refer to?

Doubtful debt refers to the uncertainty associated with the collectibility of accounts receivable. This means it is a type of debt that may or may not be repaid, creating a concern that the borrower may default on their obligation. In accounting, companies need to recognize that not all debts will be successfully collected, and therefore, they set aside an allowance for doubtful debts. This anticipates potential losses from customers who may be unable to fulfill their payment responsibilities.

The concept plays a crucial role in financial reporting, as it helps provide a more accurate picture of the company's assets by accounting for these uncertainties. By acknowledging doubtful debts, a business can better manage its credit risks and make informed financial decisions.