What Are Bad Debts?
Bad debts are the debts that cannot be recovered. The company sells goods to the customers on credit and if one of the customers does not pay the company, such unpaid amount by the customer is considered as bad debt. The amount is considered as bad debt after all the attempts or reasonable efforts are made by company to recover it from the customer. If the customer pays some part of the amount due then only the amount that is unpaid by the customer is considered as bad debt.
The amount of bad debts is written off and treated as a loss/expense by the company to avoid overstating its profit.
What Are Doubtful Debts?
Doubtful debts are the debts which may or may not be recovered. There is doubt as to whether they would be recovered or not. There is still hope of receiving the payment from the customer so they are not considered as bad and written off. Bad debts are a certain loss/expense and there is no possibility of their recovery whereas the doubtful debts are uncertain loss/expense and there is still a possibility of their recovery.
For doubtful debts, the company creates a provision which is called as provision for doubtful debts or provision for bad and doubtful debts or allowance for doubtful accounts. The provision is created so as to match the uncertain loss of the current period with the sales of the current period to which the debts are related.
Bad Debts Recovered:-
Sometimes it happens that the debts which were previously considered as bad and written off are recovered in the subsequent period. Some amount of bad debts may be recovered or the full amount may be recovered. The amount that is recovered is called as bad debts recovered and is treated as a gain/income now as it was treated as loss/expense before.