A bad debt or un-collectible account is a receivable owed by a customer, client, or patient which the business owner or creditor is not able to collect. Bad debts may be written off by the creditor at the end of the year, if it is determined that the debt is un-collectible.
In order to determine if there are any bad debts in the accounts receivable listing, an accounts receivable aging report is run, showing how much money is owed by each creditor and how long it has been outstanding.
Bad Debts and Accounting Method
If your business operates on a cash accounting basis (rather than an accrual accounting basis), you can't deduct bad debts because in cash accounting you don't record the income until you have received the payment. In this case, you just don't receive the income, so there is no tax benefit to recording a bad debt.
Service Businesses and Bad Debts
In the same manner as cash accounting, you can't record a bad debt expense deduction if you don't get paid for a service. You may have a receivable, but you must collect the receivable in order to record the income. No income recorded, no bad debt.