What is meant by bad debt in accounting?

Bad debt in accounting refers to the amounts owed to a business by customers or clients that are unlikely to be collected. This situation typically arises when a debtor is unable to pay their obligations due to various reasons, such as financial hardship, bankruptcy, or simply refusing to pay. The classification of these receivables as "bad debt" is significant because it allows businesses to recognize that the expected cash inflow will not occur, leading to an adjustment in the financial statements.

When a business identifies that certain debts will not be paid back, it needs to account for these losses. This is usually done through a process known as "writing off" the bad debt, which impacts the income statement by increasing expense and reducing net income. This process also helps provide a more accurate picture of the company's financial health by ensuring that accounts receivable reflects only the amounts likely to be collected.

The other choices do not align with the definition of bad debt. For instance, debts that will be paid back in full would not be categorized as bad debt because they represent expected revenue. Similarly, debts that are merely incurred but not documented do not fit because they might not even represent legitimate claims against customers. Lastly, loans given to solvent businesses do not pertain to bad debts since