Definition
Trade Receivables and Bad Debts
Trade receivables are amounts customers owe for goods or services sold on credit, and bad debts are those receivables deemed uncollectible and written off.
Receivables sit as current assets on the balance sheet. When a customer is unlikely to pay, the company books a provision for doubtful debts and, when collection is abandoned, writes off the amount as a bad debt expense in the P&L.
Rising receivables relative to sales (higher receivable days) or growing bad-debt provisions can signal lax credit policies or customer stress. Under the expected credit loss model in Ind AS, companies provide for expected receivable losses upfront rather than only when default occurs.
Related terms
- Receivable Days (DSO)Receivable days, or days sales outstanding, measure the average number of days a company takes to collect payment from its customers after a sale.
- Expected Credit Loss (ECL)Expected Credit Loss is a forward-looking provisioning model under Ind AS 109 that estimates likely loan losses based on probability of default, not just incurred defaults.
- Provisions (Accounting)A provision is a liability of uncertain timing or amount that a company recognises when it has a present obligation likely to require an outflow of resources.
- Working Capital CycleThe working capital cycle is the time it takes a company to convert its investment in inventory and receivables back into cash, net of payables.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.