Bad Debt
Definition
Money owed to you that you have given up on collecting. It is written off as an expense and removed from accounts receivable.
Want a deeper explanation?
Bad debt is a cost of selling on credit. A little is normal; a lot usually means credit terms are being given too freely.
If you carry an allowance, the write-off reduces the allowance instead of hitting the P&L again. Watch for: old receivables nobody has chased that are quietly bad debt already, overstating both assets and profit.
Example
A boutique that owed you $3,200 goes out of business. You write the invoice off as bad debt expense.