Bad debt is an invoice that a business has determined is uncollectible and writes off as a loss. It typically occurs when a customer becomes insolvent, disputes the charge irrecoverably, or simply disappears. Bad debt expense reduces net income and is tax-deductible in most jurisdictions.
Most businesses write off invoices after 90–180 days of failed collection attempts. The two accounting methods are direct write-off (simple but less GAAP-compliant) and allowance for doubtful accounts (estimate bad debt as a % of AR each period).
Days Sales Outstanding (DSO) is the average number of days a business takes to collect payment after a sale on credit. It is calculated as (Accounts Receivable ÷ Total Credit Sales) × Number of Days. A lower DSO means faster cash collection and healthier working capital.
An accounts receivable (AR) aging report is a financial document that groups unpaid customer invoices by how long they have been outstanding — typically Current, 1–30, 31–60, 61–90, and 90+ days. It is the primary tool for spotting collection risk and prioritizing follow-up.
Dunning is the structured process of communicating with customers to collect overdue invoices. It typically combines automated email reminders, phone calls, and escalation letters at fixed intervals (e.g., 3, 7, 14, and 30 days past due) before referring the debt to collections.
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