Debt from a credit sale that the
creditor is unable to collect. Debt becomes bad debt when the creditor has made all reasonable efforts to collect the debt but has been unable to do so. Often, this occurs when the debtor declares
bankruptcy or when pursuing
collection attempts further will
cost more than the debt itself. A company
writes off bad debt as an
expense, which reduces its
taxable income. However, it also deprives the company of
cash flow that is ultimately necessary to keep it in business.