Bad debt is the debt which can not be recovered or the debt which have become irrecoverable. Situations which can lead to bad debt include the situation when the debtor is dead and has left no money to pay his debt or when debtor become bankrupt.
Bad debt is loss to business and must be written off from books of accounts.
Bad debt is written off from business books by making the following entries:
Dr. bad debt account
Cr. debtors account
(being the adjustment entry for bad debt)
In profit and loss account bad debt is debited to reduce the profit and in the statement of financial position the amount of bad debt reduce the debtors balance.