A lot of companies and businesses often end up with bad debt. These companies regard the bad debt as a loss for all intents and purposes; to them it's just a cost of doing business. From the accounting department's point of view, this debt is in the accounts receivable category and these accounts receivable will not be paid. Sooner or later, these bad debts will be written off by the company and then put into the expense category, which reduces the income of the company on the accounting statements.
Most companies and its ownership/management will anticipate some bad debt from time to time. It's unfortunate but also a part of doing business. This debt could be from loans paid out that will not be repaid or from accounts that will not be paid for various reasons. In a competitive world, bad debt is often just part of doing business. There are many business experts who will make their reputation, as well as their fortunes, on taking some risks to make a profit. These risks are made based on information available at that particular time. Very few business people want to end up with accounts receivables or loans that are not going to be paid off, however they will recognize it's bound happen from time to time.
Bad Debt is not Always a Total Loss
Interestingly, not all bad debt is considered disastrous for a business. The clever accountants can usually find a way to make up for the debt loss that is not collected. The accountants will often uses type of debt to get some money back on taxes when it is reported as a loss. This debt can be deducted on tax returns under certain conditions. This debt must be considered legitimate debt in the eyes of the Internal Revenue Service (IRS). This debt must also be a loss for the current tax year of the company.
The IRS has many complex rules. And in order to qualify for these deductions the bad debt must meet certain rules. It is the job of the accountant or tax lawyer to study and understand these rules so that there will be no subsequent problems presented by the government auditors and officials. The abuse and misuse of these deductions could be worse than the initial loss from the bad debt. Company debts will differ quite significantly from the debts of an individual. Each company will have experts who are ready and able to figure out ways to use debt to the benefit of their company.
