Difference Between Bad Debt And Impairment
Bad Debt vs. Impairment: Understanding the Key Differences Businesses regularly face situations where they must recognize losses in their financial statements. Two common accounting concepts that often cause confusion are bad debt and impairment . Although both reduce a company's profit, they apply to different types of assets and arise from different circumstances. This guide explains the difference between bad debt and impairment, how each is recognized, and why understanding the distinction is important for accurate financial reporting. What Is Bad Debt? Bad debt is the loss a business records when it determines that money owed by a customer is no longer recoverable. This usually happens when a customer becomes insolvent, is declared bankrupt, or is otherwise unable to pay outstanding invoices. Since the company is unlikely to receive the cash, the receivable is written off and recognized as a bad debt expense in the income statement. Example A company sells goods wor...