Sometimes, you would raise invoices for your customers after you deliver them your goods or services. In some cases, customers will be unable to pay up for these goods or services. The final burden of the invoice that you’ve raised for them will eventually fall on you. These are called as Bad Debts.
Initially, when a sales transaction is created for a customer, the amount will be recorded under the Accounts Receivable or Sundry Debtors accounts. However, when the customer is unable to pay the amount, it will be written off under the Bad Debts account, which eventually reduces the amount in Accounts Receivable.
Let’s say you sell 20 pens, each of Rs. 10 to a customer called John. Now, you deliver the goods to John and send him an invoice for the same. Due to a financial situation, John is unable to pay you the Rs. 200 (20*10) that he owes you. In such a case, you write off this invoice under the Bad Debts account. Eventually, the Accounts Receivables will be deducted by 200.