What is the difference between bad debt and doubtful debt?

Doubtful debt is uncertain: the risk of non-payment is probable but the loss is not yet definitive — it requires a provision. Bad debt is certain: the loss is definitively recognisable, typically following judicial liquidation, confirmed insolvency, or expiry of the statute of limitations. Doubtful debt becomes bad debt once all recovery options are exhausted.

How do you calculate bad debt expense?

Bad debt expense can be calculated using two methods. The direct write-off method records the loss when a specific receivable is confirmed irrecoverable. The allowance method estimates bad debt as a percentage of total receivables or aged receivables based on historical loss rates — typically 1 to 5% of annual revenue depending on industry and client profile. The allowance method is more commonly required under accrual accounting standards.

At what point should a receivable be written off as bad debt?

A receivable should be written off when there is certainty or near-certainty that it will not be recovered. Trigger events include: judicial liquidation with insufficient assets, disappearance of the debtor, failure of all pre-litigation and litigation actions, or expiry of the limitation period. As a practical benchmark, receivables over 180 days have less than 50% recovery probability — at that point a write-off decision should be under active review.

Does credit insurance cover all bad debt losses?

No. Credit insurance covers a defined percentage of losses on insured receivables — typically 70 to 90% of the insured amount — subject to policy limits, approved credit limits per buyer, and compliance with claim filing procedures. Uninsured receivables, receivables exceeding approved limits, and late-filed claims are typically excluded.

Bad Debt: Definition, Accounting Treatment and Prevention

Bad debt is a collections failure, but also a risk that can be anticipated.

Definition

Bad debt is a customer receivable for which the company has certainty or near-certainty that it will not be paid. It must be recorded as a definitive loss in exceptional charges.

It differs from a doubtful debt, a receivable for which the risk of non-payment is probable but not yet certain, which is subject to a provision.

When Does a Receivable Become Irrecoverable?

Several situations may qualify a receivable as irrecoverable:

Judicial liquidation of the client without sufficient assets to pay creditors
Disappearance of the debtor without known address despite searches
Statute of limitations on the receivable
Court ruling confirming insolvency
Deliberate debt forgiveness (rare, fiscally regulated)

Accounting Treatment

The Doubtful Debt Provision

Before recording a definitive loss, the company must create a doubtful debt provision as soon as a non-recovery risk is probable. This provision is tax-deductible if it meets fiscal deductibility conditions.

Recording the Definitive Loss

When the receivable is definitively irrecoverable, it's recorded as a definitive loss in the accounts. Where applicable, VAT previously collected may be recovered.

4 Actions to Reduce Bad Debt

1. Anticipate with customer scoring
A scoring model allows you to identify high-risk clients before extending credit or before extending payment terms.

2. Act fast on aged receivables
Collection probability drops sharply after 90 days. Each additional week without action increases the risk of loss.

3. Include a retention of title clause
For goods sales, a retention of title clause allows you to recover goods in case of non-payment.

4. Take out credit insurance
For high-risk portfolios or export markets, credit insurance covers a portion of bad debt losses.

Frequently Asked Questions About Bad Debt

What is the statute of limitations on a commercial receivable?

In most European jurisdictions, commercial receivables have a limitation period of 5 to 6 years from the date of exigibility. After this period, the receivable is statute-barred and can no longer be pursued.

Can bad debt be deducted from taxable income?

Yes, under conditions. The loss must be definitive and justified (liquidation judgment, insolvency certificate). Doubtful debt provisions are also deductible if they meet fiscal deductibility conditions.

What is the difference between a doubtful debt and bad debt?

Doubtful debt is uncertain: the risk is probable but the loss is not definitive. Bad debt is certain: the loss is definitively recognisable.